OPTIMAL WEALTH STRATEGY GROUP
Beneficial Trust | Business Trust | Charitable Trust | Real Estate Trust...
Optimal Asset Protection with Tax Advantages
"Own Nothing, Control Everything" - John D. Rockefeller
One common pitfall individuals encounter on their journey to financial literacy is the tendency to overcomplicate the process. The educational system, with its intricate design, often contributes to this complexity. However, comprehending the mechanics of our trust and understanding how tools like life insurance and the trust collaborate is refreshingly straightforward in building generational wealth.
Consider the complexity of entities like LLCs, C corps, S corps, or government entities. They often seem so confusing that individuals resort to hiring multiple CPAs or lawyers just to ensure compliance. The tax code book itself is a testament to the intricate nature of the financial system, deliberately designed to be challenging.
Yet, when delving into the world of non-grantor spendthrift trusts, you'll discover a surprising simplicity. Operating such trusts boils down to a basic understanding of what qualifies as a trust expense and what does not. Unlike the overwhelming complexity associated with other financial structures, managing and utilizing a non-grantor spendthrift trust is remarkably straightforward.
As the trustee, you are empowered to make strategic financial decisions that allow you to enjoy life while minimizing personal expenses. The IRS restricts trustees from using trust funds for personal expenses such as food, entertainment, or fashion. However, the key lies in leveraging the trust structure to your advantage. When the trust was initially established, you made a conscious decision to transfer all your personal assets to it, aligning with the principle of owning nothing but controlling everything. By doing so, the trust now bears the responsibility for all your personal expenses, effectively reducing your personal liability.
This strategic move has significant legal implications. Formerly, as the owner of properties and assets, you were obligated to cover expenses such as mortgages, property taxes and vehicle expenses. Now, with the trust as the owner, these obligations shift, and the trust utilizes tax-deferred funds to cover these costs. This approach ensures that every financial action taken is fully compliant with the law, eliminating any concerns related to personal ownership and expenses.
Decoding Retirement Programs: Who's Really Benefitting?
Ever thought about anyone you know who has genuinely retired solely from a retirement program? Let's take a closer look at these programs and who's behind their creation. The popular 401ks, for instance, were established by the government. Now, ponder this – does the government truly have your best interests at heart? Do they wake up each day thinking about how they can ensure all Americans have a comfortable retirement? The reality is, most people don't know anyone who has retired solely relying on a 401k.
It's essential to grasp that the government might not be as invested in your family's well-being as you might hope. Their primary interest lies in your money. This is where the modified endowment contract rule on life insurance comes into play. Wealthy families have long used life insurance to pass on their wealth while avoiding probate and taxes. However, the government, with its retirement programs, imposes rules to redirect your money away from alternatives like life insurance.
What It Means To Defer Taxes
People often wonder about the concept of deferring taxes indefinitely. To defer taxes means you're essentially postponing the payment of taxes to the government. Instead of paying them right away, you choose to keep the money in a trust. The government, in turn, permits you to utilize that money for trust-related expenses. For instance, if the trust owns real estate, the funds can be used to cover costs like property maintenance, gardening, or hiring a maid. The advantage of having a trust and deferring taxes is that as long as you're actively using the trust for its intended purposes, the money remains deferred, providing ongoing benefits for the beneficiaries.
What About Businesses?
Business Operations with a Trust
You may be thinking about running your business directly from a trust, but it's not always a straightforward process. Depending on your situation, your accountants might suggest establishing an LLC, where a professional license is required. The system, however, introduces complexities. For instance, to sell insurance and assist others, you need to acquire an insurance license within the existing framework.
Here's where the system becomes somewhat tricky. The government permits you, personally, to hold the insurance license, tying it to your individual identity or through an LLC or corporation. Interestingly, a trust is not allowed to hold a professional license, affecting individuals in various professions like lawyers, doctors, attorneys, insurance agents, and mortgage brokers—basically anyone entrenched in the system.
Yet, there are workaround solutions. You can establish an LLC and structure a partnership agreement where the trust owns a significant percentage of the shares (e.g., 95% or 90%). Through a partnership agreement, you can navigate the complexities and still operate your business effectively within the legal framework.
Now, let's discuss the distinctions between beneficial and business trusts. The beneficial trust comes with a valuable feature – asset protection. It allows you to defer various types of income, including passive income, K1 income, and active income like capital gains.
In the case of the business trust, all the tax benefits revolve around it. Whether it's real estate investing, dealing with crypto, stocks, bonds, or any investment activity generating passive income, K1 distributions, or capital gains – the business trust has got it all covered. It functions as a discretionary trust, ensuring compliance with IRC 643, making it a go-to choice for those involved in diverse investment activities. Understanding these nuances can help you make informed decisions about which trust aligns best with your financial goals.
Securing Your Finances: Transitioning Accounts to Your Trust
When it comes to security accounts, bank accounts, and cash accounts, if they're all in your name, deeding them over to your trust might seem like a puzzle. The solution is simpler than you might think. Pull the cash out, transfer it to the trust, and document the transaction on your demand note. This way, you can utilize the funds to support various aspects of the trust.
To streamline this process, it's as straightforward as opening a bank account in the trust's name. Once the trust is established, all credit cards can be directed to it, accompanied by obtaining an EIN number. While the trust can't technically own credit cards, maintaining personal ownership keeps your credit intact, as you continue to be leveraged for the trust.
There's a nifty trick to turn your personal credit card into a trust credit card – simply write "trust account" boldly on it. This doesn't compromise your personal credit; instead, it channels credit usage exclusively for the trust. The key here is to use this designated credit card solely for trust-related expenses, fostering credit growth akin to that of an LLC. While you might need to co-sign initially, this strategic approach allows you to transition your accounts smoothly while safeguarding your personal credit standing.
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Last updated May 1, 2024
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