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Trusts and private foundations aren’t
just for the rich and famous like Warren Buffet or Bill Gates.
Nowadays, even people of modest means are realizing the great
benefits trust and foundations can provide. Read on to see if you
can, too.
There are many different kinds of trusts and foundations, but they
all share a common element—control. Using them, you can control what
happens to your assets while you are alive, in the event of
incapacity and for generations to come.
For instance, a trust is highly recommended if you and your spouse
each have children from a previous marriage and you want to avoid
any conflict when one of you passes away or becomes incapacitated. A
trust can be just the thing if you are concerned about a child
losing their inheritance in a divorce. And in today’s litigious
society, trusts can be used to shield assets from lawsuits. A trust
can be as simple or as complicated as you need it to be.
Foundations have many similarities to a trust. The main difference,
though, is that foundations are designed specifically for
charitable, religious, educational, scientific or literary purposes.
Like a trust, a foundation allows you to control how the assets are
invested, who they are distributed to and when. Plus, there are tax
benefits for transferring assets into a foundation that aren’t
available with most trusts.
If you expect to leave several hundred thousands of dollars in
assets to charity, a foundation may be right for you. That’s
especially true if you want the assets invested and each year’s
earnings distributed to a special cause.
There’s more involved in setting up a foundation as compared to a
trust. They also require more work. Accurate records must be kept
and informational tax returns must be filed. For those with much
smaller contributions, it may be easier to donate the money or
assets to an existing organization as opposed to forming your own.
But it may be easier to donate a significant amount than you think.
You might have a life insurance policy that you’ve had for years
that you no longer need. Instead of canceling it, you can name your
foundation as the beneficiary. If fact, life insurance is a great
way to not only provide the initial funding for a foundation, but
also to help it increase in size over time.
I mentioned tax incentives. Appreciated assets like real estate or
stocks can be transferred into a foundation (and certain charitable
trusts). That way capital gains taxes don’t have to be paid and you
still get a tax deduction for the contribution. The result is that
your charity receives more money than if you sold the asset, paid
the taxes and donated the remainder.
There are different versions of charitable trusts. Some allow you to
donate an appreciated asset, get a tax deduction, and receive an
income stream for life. When you die the remainder can be used by
your favorite charity. Another version is similar but the charity
receives the income stream during your life and your heirs receive
the remainder at your death. This can be beneficial if you have
investment property that has greatly appreciated, you need income
and you don’t want to pay all the taxes.
In can cost thousands of dollars to set up a trust that allows you
to avoid probate and protect your child’s inheritance from a
lawsuit. Foundations can be even more expensive. But they don’t have
to be.
If you are comfortable doing research on your own and are willing to
take the time, you can set up a trust and/or foundation on your own
very inexpensively. Legally, you can serve as your own attorney and
draft your own estate documents. There are many sources that provide
templates. If your situation is straightforward, all you have to do
is fill in the blanks.
For those with more involved situations an experienced attorney is
recommended. Even if you do it yourself, it’s not a bad idea to have
an attorney review it. Lastly, a trust does nothing for you unless
you transfer assets into it. Don’t forget that step or all your work
will have been for naught.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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