It is a common misconception that trusts are used only by the wealthy when they need to manage complex financial arrangements. While persons of wealth often do find trusts helpful, the majority of trusts are created by people of moderate means for reasons that are as old as humanity.
Life presents many situations in which complete and absolute ownership of property is neither necessary nor desirable. Centuries ago, trusts were developed to provide management for property in these situations. Through a trust, you can:
- Provide income to yourself or someone else for a period of years or for life.
- Delay distribution of money or other property (example: until a child reaches a certain age).
- Have property professionally managed for life or a number of years.
A trust document may consist of one page or hundreds, depending on its purpose. You may choose to serve as your own trustee.
Advantages of Charitable Trusts
A special group of trusts (charitable trusts) combines charitable giving with other financial goals.
As the donor, you transfer property (cash or other assets) to a trust. Income is paid to you or another beneficiary you name for up to 20 years or for one or more persons' lifetimes. When the trust's term ends, the property remaining in the trust (the charitable remainder) becomes a gift to the organization of your choice.
Charitable trusts also bring you tax benefits because they result in charitable gifts. Income, gift, and estate tax deductions are allowed for the gift portion.
Assets that have increased in value but earn little income can be placed in a charitable trust, sold, and reinvested in higher-yielding assets. Since the trust is tax-exempt, the capital gains generated by the sale are generally not subject to tax. The entire proceeds of the sale are thus available to generate income.
Income you receive may be fixed at the time the trust is created, or it can fluctuate with the value of the assets in trust. Tax-free income is also possible in many instances.
Meeting Educational Expenses
If you are faced with rising costs of education for children or grandchildren, it can be difficult to make charitable gifts or discretionary outlays of any kind.
Fortunately, a charitable trust can help. It can be created to last for only as long as circumstances dictate. The remainder then becomes a charitable gift.
While funds you give to children or others for educational expenses are not tax deductible (and may even be subject to gift tax), a portion of the assets placed in a charitable education trust is tax-deductible, since the remainder will belong to charity.
Caring for Older Relatives
Many people preparing for their own retirement are also providing some sort of financial assistance to parents or other older relatives.
Such expenses are non-deductible for tax purposes and can be subject to gift tax if they exceed amounts.
Again, charitable trusts can offer a solution. You can transfer assets to a charitable trust that will pay income for life to an older relative or friend.
A charitable deduction based on the life expectancy of the relative is allowed. The older the income beneficiary, the shorter the trust will be presumed to last. Therefore, tax savings can be significant because the expected shorter payout period results in a larger charitable gift.