What is a pure trust fund?

Answer 1

Trusts are contractually created organizations designed to protect assets both during and after the life of a person or persons known as the trust grantor (sometimes called settlor).

The main purpose of some asset protection trusts is to avoid public probate of a person's assets through a will which can often lead to court battles and hard feelings by the beneficiaries who wrangle over who gets "the best stuff" or the larger share. The terms of a trust, unlike a will, need never be made public, and the beneficiaries need never be told by the trustee what others may or may not have received.

A trust may be set up by the grantor during his/her lifetime, or it may be created after his/her death in accordance to the terms of a will. The will itself may be generic, such as "all real estate, personal property, stock and other assets to be placed in trust with so-and-so as trustee to be distributed to beneficiaries in accordance to the Letter of Instructions held by my attorney." Although the will itself will be read to the decedent's survivors and administered by the probate court, the Letter of Instructions would be seen only by the trustee of the trust.

Though there are dozens of kinds of trusts to suit various purposes, they come in only two types: revocable and irrevocable.

A pure trust is an irrevocable trust set up by a grantor who cannot be a beneficiary of the trust and usually is also not the trustee. A pure trust, unlike a living trust, survives the grantor and may be:

• perpetual like Joseph Kennedy's (earnings paid out to descendants but principal left untouched)
• time-limited like Benjamin Franklin's (3/4 was distributed after 100 years and the balance at the end of 200 years) or a spendthrift trust which is terminated on the death of a specific beneficiary.
• generational, e.g., until the last grandchild dies

Taxation:

Most other forms of trusts are revocable by the grantor and therefore assets within the trust are considered personal assets of the grantor, so earnings within the trust are taxable to the grantor unless the trust is specifically for an approved nontaxable purpose, e.g., a charitable foundation or an education trust fund to pay college expenses of one's children, grandchildren or other relatives. The tax ID of the trust is the Social Security Number of the Grantor. If the trust has employees, it may also have an Employer Identification Number (EIN) for payroll tax purposes.

Assets placed into a pure trust, on the other hand, no longer belong to the grantor who has no control over the assets. Earnings are not taxable to the grantor, nor are they taxable to the trustee who is merely a fiduciary holding the assets for the benefit of the beneficiaries. The assets become taxable to the beneficiaries only when they are distributed to them. Therefore, no estate taxes diminish the assets, and assets in the trust can grow tax-deferred until a taxable event occurs, often long after the grantor is dead. Generally no tax ID is issued to the trust unless it has employees, then an EIN can be issued to the trustee for payroll tax purposes. The trustee(s) and outside consultants, such as attorneys and Accountants, are not employees.

For this reason the IRS disparages pure trusts and tries to convince people to avoid "pure trust scams." Courts, on the other hand, have consistently ruled in favor of pure trusts (if contractually sound). Benjamin Franklin's trusts were attacked a number of times over two centuries by descendents and government bureaucrats but were upheld by state and appeals courts every time.

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Joy and abundance,

Cimarron Layne

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