Some of the ways trusts might benefit you include: Protecting and preserving your assets. Customizing and controlling how your wealth is distributed. Minimizing federal or state taxes.
One of the main reasons for trust funds is to make sure the money isn't squandered (pissed away) before it gets to the kids for school and college. Keeping the kids from pissing it away is another matter. Many trust funds are set up for a limited time, such as until age 21 or 30.
The long-favored grantor-retained annuity trusts (GRATs) can confer big tax savings during recessions. These trusts pay a fixed annuity during the trust term, which is usually two years, and any appreciation of the assets' value is not subject to estate tax.
Personal Values and Interests: Many wealthy individuals are motivated by personal values or causes they are passionate about. By donating to charities, they can support initiatives that align with their beliefs, such as education, healthcare, environmental conservation, or poverty alleviation.
Some ultra-wealthy givers make genuine efforts to give back. But others appear to use charity to burnish their public image, amplify their political voice, and protect their assets.
Understanding Philanthropic Tax Benefits
These benefits are primarily realized through tax deductions and credits that can help reduce the taxable income of the donor. When you make a charitable contribution, a portion of that donation is deductible from your income, which can significantly decrease your tax liability.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.
Less than 2 percent of the U.S. population receives a trust fund, usually as a means of inheriting large sums of money from wealthy parents, according to the Survey of Consumer Finances. The median amount is about $285,000 (the average was $4,062,918) — enough to make a major, lasting impact.
Key aspects of trust fund syndrome include: Lack of Motivation: Individuals with trust fund syndrome may lack the drive to pursue education, careers, or personal goals because they do not need to work for financial stability.
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential?
Charitable Trusts: Contributing with a Purpose
Rockefeller used charity trusts, which allowed him to devote a portion of his money towards humanitarian endeavors such as education and healthcare.
Secret trusts and LLCs are increasingly common ways wealthy people are shielding assets in divorce. Trusts and offshore accounts controlled by a shadowy company.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
For starters, there are two types of trusts. If you are putting your assets in a revocable trust, the IRS could go after your assets in the trust. However, if you are putting the assets in an Irrevocable trust, the IRS generally cannot go after your money.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
How Long Can a Trust Fund Last? Generally, a trust fund is only supposed to last up to 21 years. Such a fund is really only supposed to last until its purpose has been served, and there is rarely a reason for a trust fund to need to last longer than that.
In some years, billionaires such as Jeff Bezos, Elon Musk and George Soros paid no federal income taxes at all. Billionaires avoid these taxes by taking out special ultra-low-interest loans available only to them and using their assets as collateral.
In fact, many wealthy people can and do "live off the interest." That is, they put a chunk of their fortune in a relatively safe collection of income-generating assets and live off of that—allowing them to be more adventurous with the rest.
This is by getting a mortgage and/or having investors invest with you. You leverage other people's money (OPM) to buy a property. An example of how we leveraged money was when we invested in a 77-unit apartment building in Albuquerque, New Mexico. We got a loan from a bank for 80% of the value of the building.
When a business owner sells their business or a corporate executive receives a windfall in W2 compensation, some of these individuals will set up and fund a private foundation to capture a significant tax deduction, and potentially pre-fund their charitable giving for the rest of their lives and beyond.
Most of the government's federal income tax revenue comes from the nation's top income earners. In 2021, the top 5% of earners — people with incomes $252,840 and above — collectively paid over $1.4 trillion in income taxes, or about 66% of the national total.
In other words, billionaires and other high-net-worth-individuals can borrow large sums of cash using their portfolio of stock to secure that money. Since loans aren't technically income, they're not subject to income tax. The money is generally still subject to interest, though rates vary.