Using trusts to meet tax & non-tax goals

Your Tax Preparer


March 16, 2024

Trusts have been used as an integral part of sophisticated tax and financial arrangements for centuries. Exactly how they are used depends on a person's particular goals, current tax rules, and other factors. Hopefully this article helps you to understand some ways a trust may help you.

D. David Hebebrand CPA.

A trust is an arrangement in which title to property is held by someone for another's benefit. The trust can be established to benefit the person creating it (the grantor), or to benefit another (the beneficiary). Trusts can operate during the grantor's life or be established by the grantor's will. Trusts can be revocable (you can change your mind) or irrevocable. Hence, trusts are very flexible, and can accomplish many purposes.

Trusts can (1) help you manage your property and investments more easily and expertly (2) help you avoid probate costs (3) life insurance proceeds out of your estate (4) protect the interests of your minor children (5) protect assets if your estate is over $13.6 million per person (6) allow a marital estate tax deduction for property that ultimately will go to other beneficiaries you name (7) let you get an income tax deduction for a contribution to charity while you continue to get income from the contributed property (see the end of this article). The income taxes on trust property can be taxed to the grantor, the trust, or the beneficiary depending on how the trust is set up, and what the trust is intended to do.

Finally, trusts of course need trustees. The grantor can serve as trustee as long as they are alive and competent. When a trust is created, the grantor names a successor trustee to take control of the trust properties when the grantor dies, decides they don't want to be trustee, or has mental impairment that prevents them from functioning as trustee. The successor trustee then manages the trust property and distributes the income to the beneficiary (beneficiaries) named in the trust agreement. If the grantors are deceased, the successor trustee then distributes the trust property in accordance with the instructions in the trust. Who should you name as a successor trustee? It could be a trusted family member, a friend, professional advisor, or financial institution (hopefully someone familiar with how trusts operate, knowledgeable on tax and financial matters, and who has the time and expertise to manage the trust properties).

One of the advantages of a trust is the avoidance of probate and the related expenses of probate. A will indicates who is to receive the deceased person's property, but if the deceased individual owned real estate or over $166,250 in personal property, the deceased person's property must go through probate before it is distributed to the heirs. The statutory fees for attorneys (and executors – they both are entitled to the following fees) are 4% of the first $100,000, 3% on the next $100,000, 2% on the next $800,000 and 1% on the next $9,000,000. Hence, the minimum attorney fees for someone owning $500,000 at death would be $13,000 (the executor is entitled to the same amount) plus the court fees on top of that, and the fact that the deceased's property is often tied up in probate for 1-2 years before it is distributed to the heirs. Better to pay an attorney to draft a trust agreement and avoid the prohibitive costs of probate.

Charitable Lead or Remainder Trusts

You are entitled to a tax deduction for making a contribution to a charity. There is a way to benefit both yourself (the donor) and a charity by using an irrevocable charitable trust. In a charitable lead trust (CLT) property is placed in an irrevocable (the trust cannot be changed) trust, and the income from the trust is paid to a qualified charitable recipient (a church, university, or non-profit organization named in the trust agreement) for a specific period of time named in the trust. At the conclusion of the term of the income payments, the CLT distributes the trust property to a remainder beneficiary named in the trust (can be you or another person). The donor (you) get a tax deduction, the charity receives income. In a charitable remainder trust (CRT), the sequence is reversed. The donor (or named beneficiary) receives the income up front, and at the conclusion of the period specified (can be the life of the donor) the charity receives the property. A CRT is especially valuable as a way to dispose of appreciated property without having to pay tax on the gain, and receive income from the property.

We at Moats and Hebebrand CPAs are here to help. If you have any questions regarding trusts please call.

Moats and Hebebrand CPAs is located at 20231 Valley Blvd., Ste. E, Tehachapi, or call (661) 822-1750.


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