They can be useful trusts
Trusts are often referred to as the “Crown Jewels” of the American legal system because they can be a great way to help avoid a financial or personal crisis.
One of the best uses for a trust is to hold and manage money that belongs to minors. This applies to accident settlements, grandparent donations, and inheritances. Having the Trustees manage these funds avoids red sports car syndrome and the beneficiary doesn’t even need a checkbook. Trustees can pay for college tuition, braces, living expenses, health insurance, and purchase a more manageable Honda. Trusts do not have to end at age 18 and can help ensure that the beneficiary gets a few years of experience before receiving their money.
Another great use of trusts is to protect disabled beneficiaries. Both Congress and New Jersey have adopted laws that allow a person to keep public benefits like Medicaid, even if they receive a settlement by accident or inheritance. The money must be deposited 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 supplemental services and needs such as wheelchairs, additional medical services, and items that improve the quality of life for the disabled person. When the trust ends, any Medicaid benefits must be reimbursed to the state. Reimbursement is made at the state’s wholesale payment rate and the balance can be distributed to the beneficiary or anyone else.
Princeton University is a trust, as is Tulane University, where I studied law. Both are excellent examples of educational trusts managed by a board of directors. 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 typically tax deductible up to the limits allowed by the IRS Code.
Speaking of taxes, it is important to note that most trusts must pay both state and federal taxes. The rules are complex and the tax rates on the 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 fiduciary investments to limit taxes.
Proper Trusts Are Well Accepted by the IRS The IRS actually has approved trust forms available on its website at http://www.irs.gov. Your accountant or attorney can help you with any tax problem and understand how fiduciary taxation would apply to your particular circumstances.
Our world is turning green and land trusts are now a popular way to help with our environment. Family environmental trusts and land preservation trusts have been helpful in preserving habitats and sanctuaries for future generations. These trusts are typically charitable trusts and there are some tax benefits allowed by the IRS when land is preserved or environmental easements are protected.
The important part is recognizing that trusts can be very helpful. They are sanctioned by our government when they are properly configured, managed and, of course, taxed if applicable.
