Trusts and Tax Planning
A trust is a relationship that separates legal control and beneficial ownership of property. In a “discretionary” trust, the trustees make all decisions on management of the trust’s assets and distributions of trust property to beneficiaries. Because of this arrangement, the beneficiaries own nothing directly. Thus, assets owned by and through a trust are better protected from creditors, facilitating preservation of family wealth.
Depending on the characteristics of the trust and the beneficiaries, income of the trust may be allocated to beneficiaries in a way that takes advantage of potentially lower marginal tax rates. Trust property may also be distributed to beneficiaries on a tax-deferred basis, or sold and allocated to beneficiaries on a tax-efficient or tax-free basis, depending on circumstances. A trust typically allows optimal flexibility in providing for beneficiaries.
In the case of certain trusts, transfer of property to a trust enhances and protects confidentiality, and in appropriate cases, may allow for exemption from probate tax.