Trusts are often called the “Crown Jewels” of the American legal system because they can be a great way to help avoid financial or personal crisis.
One of the best uses of a trust is to hold and manage money belonging to minors. This applies to accident settlements, gifts from grandparents, and inheritances. Having trustees manage these funds avoids red sports car syndrome and the beneficiary doesn’t even need a checkbook. The trustees can pay for college tuition, braces, living expenses, health insurance and purchase a more drivable Honda. Trusts do not have to end at age 18 and can help ensure that the beneficiary gets a few years of life experience before receiving their money.
Another great use of trusts is to protect disabled beneficiaries. Both Congress and New Jersey have passed laws that allow a person to keep public benefits like Medicaid, even if they receive an accident settlement or inheritance. The money must be placed in a “D4a Trust”. The name comes from the section of federal law that sanctions this type of trust. The money can be spent on supplementary necessities and services, such as wheelchairs, additional medical services, and items that add to the disabled person’s quality of life. When the trust ends, the state must return the Medicaid benefits. Reimbursement is made at the state’s wholesale payment rate and the balance may be distributed to the beneficiary or to any other person.
Princeton University is a trust, as is Tulane University, where I studied law. Both are excellent examples of educational trusts administered by a Board of Trustees. As long as they adhere to their permitted educational purposes, these types of trusts do not pay state or federal trust taxes. Gifts to educational trusts are generally tax deductible up to the limits allowed by the IRS Code.
Speaking of taxes, it’s important to note that most trusts must pay state and federal taxes. The rules are complex and the tax rates on money that a trust holds and does not distribute to a beneficiary are very high. Money paid to a beneficiary is included on that person’s tax returns. Smart trustees can manage fiat investments to limit taxes.
Appropriate trusts are well accepted by the IRS The IRS actually has approved trust forms available on their website at http://www.irs.gov. Your accountant or lawyer can help you with any tax issues and understand how trust taxes would apply to your particular circumstances.
Our world is going green and land trusts are now a popular way to help out with our environment. Family environmental trusts and land conservation trusts have been helpful in preserving habitats and sanctuaries for future generations. These trusts are usually charitable trusts and the IRS allows some tax breaks when land is preserved or environmental easements are protected.
The important part is to recognize that trusts can be very helpful. They are sanctioned by our government when they are properly established, managed, and of course, taxed if applicable.