Trusts

In the broadest sense, a trust is a means of managing wealth for the benefit of one or several persons. Wealth can include financial assets, real estate or intellectual property like copyrights. A person can be an entity like a charitable foundation or a university or a hospital.

A trust can make your estate plan live as a working entity. It can preserve assets for the benefit of a child or parent who needs income but hasn’t the ability to manage investments. Trusts can be set up to achieve a number of objectives:

Trusts for Income Splitting — A trust can be set up to split income for taxable persons, dividing income among elderly persons who cannot handle funds themselves. If the trust is irrevocable, that is, if the testator cannot unwind the trust and take the money back, then the income will be taxed in the hands of the elderly beneficiaries. If this kind of a trust is set up, the trust agreement should specify who gets the income or distribution of assets once the elderly beneficiaries have passed away. The effect is to put the gross income of the trust into two hands, first, the income beneficiaries who pay tax only on the income they receive and second, the trust itself, which must pay tax only on realized capital gains. The result is preservation of the trust’s capital with tight control over income paid out.

Trusts for the Protection and Aid of Beneficiaries — A trust can also be established to prevent a spendthrift beneficiary from squandering money. If the trust is properly constructed, it can reduce taxes on income distributed to the beneficiary. Later, the trust can provide for the needs of grandchildren and, once they have reached a specified age, the income can be used to support their parents in retirement. A charitable remainder trust can provide for a donation to a charity but conserve assets so that the donor of the property receives income for life. The donor in this arrangement can receive a tax credit for the gift.

Once the trust instrument has been drafted, the trust can be dormant, ready to go into operation after the death of the person who directs the creation of the trust or it can come to life immediately. A trusted friend or associate can run the trust. A financial planner can help to make investment decisions or to set investment policy. The trust company can then simply be the custodian of securities.

Note that it is essential to ensure that the trust is portable, and also to prevent the trustees from having such a vested interest in a trust that they become the primary beneficiaries while only crumbs remain for the intended beneficiaries. Tax strategies and investment schemes are less important than the fidelity of those entrusted with the fruits of a lifetime of work. Therefore, keeping the roles of trustee, investment advisor, and custodian separate is one way to ensure that everybody knows what has to be done to keep the trust’s business, which is to provide genuine and cost-effective assistance to the beneficiaries.