Wealth Hacks of the Elite #6: Taxes & Trusts
Reducing your tax profile starts BEFORE you file your taxes.
You need to lay out all your assets, where they are located, how they are performing, what your future plans (and projections) are, along with so many other dimensions and variables.
This is because NOT paying your taxes is illegal, but living your life in a way that doesn’t generate as much tax is simply smart business.
What’s the trick there?
There are several.
Taxes and Trusts
Trusts are one of the biggest tools to minimize tax footprint.
When I say “trust” you MAY be thinking of the conglomerates that popped up in the Late 19th and Early 20th Centuries. The "trusts" of this era were not primarily the estate planning vehicles we will be discussing. They were massive industrial combinations, often monopolies or near-monopolies, that controlled entire sectors of the economy. Think Standard Oil, U.S. Steel, and various railroad trusts.
These trusts used their power to:
Fix Prices: Eliminating competition and charging consumers artificially high prices.
Control Production: Limiting output to maintain high prices.
Stifle Innovation: Preventing new competitors from entering the market.
Influence Politics: Using their wealth and power to lobby for favorable legislation and against regulations.
Exploit Labor: Suppressing wages and resisting unionization.
The historical trusts were business entities designed to control markets. Modern trusts (in the context of wealth management) are legal entities designed to manage and protect assets for individuals and families.
A modern trust is a separate legal entity from the grantor (the person who creates the trust), the trustee (who manages the trust), and the beneficiaries (who benefit from the trust). This separation is crucial for tax implications.
There are two key distinctions that matter a great deal here:
Grantor vs Non-Grantor
Revocable vs Irrevocable
In a Grantor Trust the grantor is treated as the owner of the trust assets for income tax purposes. The trust's income is reported on the grantor's personal tax return. This doesn't necessarily mean it's bad; it's often used strategically.
Whereas in a Non-Grantor the trust itself is a separate taxpayer. It files its own tax return (Form 1041) and pays taxes on its income. This can be advantageous for shifting income and reducing overall tax liability.
In a Revocable Trust the grantor retains control and can change or revoke the trust. This is primarily for probate avoidance and doesn't offer significant income or estate tax benefits (it's a grantor trust).
The opposite is true for irrevocable. The grantor gives up control, and the trust cannot be easily changed or revoked. This is where the real tax advantages come into play, but it requires careful planning.
Now, let’s get into the delicious details. We have 5 different types of trust to learn about + discuss the finer points of strategy and tactics.