My Take On Trusts

Building wealth for yourself and your family and for your other goals, whether charitable or personal, can be done and is done by many, even those with modest net worth.

Actually keeping it and effectively applying it to such uses is another matter, one that needs technical knowledge. There are many wonderful advisors who can help. Some work for large organizations, others may be excellent individual investment advisors, lawyers, estate planners, etc. I have worked with each of these throughout the world.

The law of different places, tax rules and government policies vary and affect what can be done. Even so, most people want a simple understanding of the overall picture.

There are valuable options that are completely legitimate. In this section, I can provide an explanation.

The subject may be somewhat complex, but it is perfectly legal (though not viewed as desirable by some who would like to control, tax or even seize your assets) and frankly, most advisors do not explain this.

Where Did Trusts Come From

Here is an explanation of the origins and history of a truly wonderful legal instrument called the trust.

There are really only a few points that you need to understand the concept, though there are far more reasons that I could explain why it works so well in certain States and not in others.

By transferring the title (legal ownership) to various assets under certain conditions into a trust “owned” and controlled by another party, you can shield them from outside legal claims, many kinds of taxes, government seizure and even from laws that attempt to permit claims by your own family members such as ones who claim to be heirs.

Use of trusts is valuable for estate planning, but it is also an awfully valuable tool for running a business.

When you designate that other party to own the assets, he or it is required to honor your wishes absolutely about how they are used and transferred. A form of carefully written contract called the “trust instrument” spells that out. The receiving party or parties is called a “trustee” or where more than one, a “co-trustee.” There is a very strict fiduciary relationship enforceable by law, under which a trustee must avoid self-dealing and respect the terms and goals of the trust.

Keep in mind that a trust is a legal instrument and is governed by the laws of the place where established, not where the grantor lives. To benefit from the best laws, the title of the assets must be held in that place through a trustee or co-trustee there. For example, to use South Dakota’s extremely favorable laws, one must also use a co-trustee there who can maintain ownership.

“Trusts” are one of the outstanding contributions of the English Common Law, expanded over the centuries from the concept of “Uses” in the feudal land law of the twelfth century, where an owner, say, a Crusader, put his ownership of land in the hands of a fiduciary while he was unavailable and sought to assure its use for the benefit of his children, or where he was unclear whether his wife could legally hold a military-titled estate or property.

Uses were later restricted by Henry VIII’s “Statute of Uses” in 1553, but further developed as trusts in the courts, and ultimately those became even more widely used in the United States.

Today, despite some efforts by those who want of control choices about how assets are used (e.g., governments, family members, creditors), trusts have become a key tool in asset protection, financial privacy and decisions about how wealth is used. They have withstood attack for centuries.

In other words, trusts are an entirely legitimate, respected tool with a very long tradition of English common law and American history.

They are absolutely not limited to the ultra-rich and their families, though one guesses that a good many of those who do have high net worth (and the good sense to plan and take responsibility) do in fact use them.

Think about it, though. Any moderately successful person today who owns a nice house, a car, savings, a business, professional or office tools, etc., whether or not considered “rich,” is apt to have enough assets to warrant protecting them.

Trusts are a key means of doing that.

For more on the history of trusts, take a look at the quite huge treatise by John H. Langbein,
History of the Common Law (2009). John is the distinguished retired Sterling Professor of Law at Yale University, and a profoundly brilliant scholar and writer. (As it happens, he and I went to high school and college together.)

Despite living in Connecticut himself, John is also the author of the term “Try not to die in Connecticut,” for the reasons he amply explains.

Those including historically exorbitant court fees, widespread corruption, very high taxes and arbitrary powers of judges. See
How Did Rich Connecticut Morph Into One of America’s Worst Performing Economies? Forbes Magazine 8/01/2013. http://tinyurl.com/y8tqyobc His observations could apply to many other states, from what I have seen. Believe me, some are far better than others.

More On What Trusts Do

Again, to create a trust entity, one enters an agreement with another party who promises to hold assets and perform tasks in accord with certain instructions.

The other party, called the trustee, “owns” and controls those assets for the benefit of the grantor or his designees, who may be family, friends, charities or whatsoever. There may be multiple trustees and multiple beneficiaries.

I said the trust is an entity, but in fact it is not. It is really a contractual arrangement.

By moving assets to another party properly, they may be kept out of the estate of the grantor at death. That means ownership can be kept secret, not subject to publicity when the grantor’s ester is made public in probate court proceedings. They can also avoid the sometimes very heavy financial burden of probate court proceedings and the inheritance rules imposed. A trust can take the place of a last will, at least for those assets. (Typically, one should have a will anyway, to provide for other assets and family matters.)

Depending on the terms of the transfer, because the title to the assets has been transferred, ownership of those assets may not be subject to tax on the grantor or to claims (such as lawsuits) against the grantor.

Specifically, the assets may possibly be exempt from federal estate tax, if handled properly.

NOTE that pending tax reform may possibly abolish the federal estate tax. However, some States also impose a State estate tax, so it is a wise choice to avoid those.

If placed in trust in the right location, assets will definitely be exempt from state and local estate and inheritance taxes, which can be significant. Again, the tax reforms may disallow the federal income tax deduction for state and local income taxes. Since South Dakota has no such taxes, that would have no direct impact there.

However, consider that New York, California, New Jersey and Connecticut already impose over 13 percent income tax on the top tier of income, plus possible surcharges, none of which would not be offset against federal tax. Thus many more families may wish to move their assets to a more favorable place. Read
How Money Walks, cited elsewhere.

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