As a dealership owner, you’ve likely taken hundreds of actions over the years to make a profit — and, ultimately, build wealth. But how much effort have you put into ensuring that this wealth will provide for you for the rest of your life and serve your intended purposes after your death?
Setting up trusts is one way to achieve these goals. Different types of trusts provide different benefits, so you need to select the right trust or trusts for your particular situation. To help you get started, the following is an explanation of some popular trusts.
Living trusts avoid probate
The principal purpose of a revocable trust (a trust you can revise), also known as a living trust, is to avoid probate, a public and potentially lengthy and expensive process. A living trust allows you to manage your assets during your life as if you still owned them outright — you become the trust’s trustee.
In addition, you select a trustee who’ll manage all trust assets immediately after your death (at which time the trust becomes irrevocable) until they’re distributed. The trustee also can manage your assets during your life should you become incapacitated and unable to do so.
Your trustee can be an institution — an investment company, for example. Or it can be an individual, such as a family member, close friend or trusted advisor.
Irrevocable trusts save tax
Irrevocable trusts (trusts that can’t be revised) typically offer the most tax advantages. They can provide significant tax savings while preserving some control over what happens to the transferred assets. There are many examples, including:
- Grantor retained annuity trusts — A business owner can put assets in one of these trusts and potentially transfer a portion of the growth on those assets out of his or her estate tax-free.
- Credit shelter (or bypass) trusts — They can help minimize estate tax by maximizing the benefit of both spouses’ estate tax exemptions.
- Qualified personal residence trusts — This type of trust allows you to give your home to your children today and, by doing so, remove it from your taxable estate at a reduced tax cost (provided you survive the trust’s term) while retaining the right to live in it for a certain period.
You can supercharge the benefits of some of these trusts by making them “grantor” trusts for income tax purposes. This allows you to transfer even more wealth to your heirs tax-free.
CRTs and CLTs are for benefactors
If you want to benefit a charity while retaining an income stream for yourself and diversifying your portfolio in a tax-advantaged way, consider a charitable remainder trust (CRT). You fund a CRT (also an irrevocable trust) with appreciated assets, which it can then sell tax-free and reinvest.
For a given term, the CRT pays an amount to you annually. You’ll owe tax when you receive the payments. But because of a special income distribution mechanism that identifies the character of the income taxable in the payments to you, much of the liability on the capital gain from the sale of the assets will be deferred.
At the term’s end, the CRT’s remaining assets pass to one or more charities. When you fund the CRT, you receive an income tax charitable deduction for the present value of the amount that will go to charity, and the property is removed from your estate.
Another vehicle, a charitable lead trust (CLT), lets you benefit charity first while eventually transferring assets to loved ones at a reduced tax cost. Ask your tax advisor for more information about CLTs as well as the varieties of CRTs available that may serve your philanthropic purposes.
Achieving your goals
Trusts can serve many purposes, and choosing the right ones for your situation is only the first step. To ensure the trusts you select will achieve your goals, work closely with your tax advisor and attorney to properly draft them.