Money Talks: Taxes, trusts and income

William F. Hague

Certainly these are familiar terms for the average retired investor here in paradise. For many, achieving the proper mix for estate planning can be overwhelming. In fact, this subject can be overwhelming for even the most seasoned advisers. There are so many permutations in the world of Trusts and Estate planning that often the use of an estate planning attorney may be necessary.

Although all three, “taxes, trusts and income,” are definite “hot buttons” for most retired investors, certainly for the higher net worth investors, these are often a necessary evil that many will have no choice but to address if they wish to exercise control over their assets after they are gone. In fact, in its simplest form, a trust is nothing more than a legal document which allows the owner of the assets to exercise control over the distribution of their estate.

For many, the use of a trust is exercised so as to perhaps take advantage of certain tax advantages while living as well as addressing the issue of taxes on their estate when it changes hands. In some cases, without any estate planning, some investors have had as much as 50 percent of their estate lost to taxes upon transfer to their beneficiaries. One of the most common mistakes lies in the very simple concept of funding a trust. Countless investors have been sold “boilerplate” trusts from their advisors and even the banks have gotten into the business of selling trusts. This is all perfectly acceptable; as long as the most basic premise is communicated to the investor.

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It is incumbent upon the investor to fund the trust by simply putting everything that they wish to flow through the trust in the name of the trust. This is perhaps the most overlooked concern for trusts and estate planning. Upon creation of a trust, the investor must then title all banks accounts, real estate, investment accounts, vehicles and anything else they wish to flow through the trust, in the name of the trust. Example; upon creation of The John Doe Revocable Trust, the banks accounts must read “John Doe Revocable Trust;” the real estate must be titled in “The John Doe Revocable Trust” and so on. Although this may seem a cumbersome task in the beginning, the trust is completely negligible and worthless in many cases, if this step is left out. Simply owning a nice leather bound trust document has zero value of this step is not executed.

Another implementation for the trust strategy is for charitable donations upon passing of the assets. Many have taken advantage of what is often referred to as a “Charitable Remainder Trust”. These trusts will designate specific assets to be transferred to a charity of the investor’s choice. There are a few benefits that are attractive for the investors while they are still living. Once the trust is established and a level of funding is committed, the investors can enjoy two benefits; while the trust can be invested in virtually any vehicle the investor desires, often they can enjoy tax favored treatment of any income generated from these trusts.

In fact, in some cases, investors can generate virtually any level of return within the trust holdings and enjoy tax free income from the trust. Although similar to tax free municipal bonds, the trust can generate significantly greater income than available from bonds which have historically yielded single digit returns. The Charitable Remainder Trust, if executed properly, could generate, for instance, a 20 percent return in any given year and the investor would have the option of taking all of the income while enjoying tax free status on the entire income for the given year.

There are strict requirements for these types of trusts such as the “irrevocable” designation, which as the tern indicates, is irrevocable upon execution of the Trust. In other words, the investor cannot take advantage of the tax free income for 5 or 10 years and then change their mind and dissolve the trust; it is after all, irrevocable.

Although they can be complicated, the piece of mind offered by the use of a trust can lead to the life of a SWAN, Sleep Well At Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or The opinions and observations stated above are those of the columnist.