3 Ways the Rich Use Trusts to Their Advantage — Do You Need One?
Despite what you might think, trusts aren’t only for the rich. Anyone can use them to grow their wealth, protect their assets, avoid certain taxes, shelter money from lawsuits and streamline the transfer of their estate to their heirs.
But the ultra-wealthy rely on the many different kinds of trusts to do all of those things on a whole other level — and they have for a long time.
In 1934, John D. Rockefeller created a trust to pass his enormous Standard Oil wealth on to his heirs. According to Ridgewood Investments, those heirs are now in their seventh generation with 170 beneficiaries — and as of 2016, the trust was still bursting with $11 billion.
Sam Walton also used trusts to pass on his fortune after Walmart created $170 billion in wealth for his family. Today, the Walton Family Holdings Trust owns half of the world’s largest retailer.
Here’s how the rich use these special legal relationships to keep the money in the family. Also see why stealth wealth is the best way to handle your money.
What Is a Trust?
According to Ridgewood Investments, “A trust is simply a legal entity through which property or assets such as cash, real estate or other investments can be protected, invested and set aside to provide for specific people or causes you care about with certain conditions or guidelines as established by the grantor (the person setting up the trust who generally contributes assets to create the trust in the first place).”
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Basically, one party with a fiduciary obligation (the trustee) holds assets on behalf of another party (the guarantor) for the benefit of another party (the beneficiary), which could be heirs or a charity. The assets belong to the trust — not the grantor, trustee or beneficiary — and are beholden to the rules and instructions established upon the trust’s creation.
Here’s how rich people use them to their advantage.
CRTs: Giving to Charity — and to Yourself
Ordinary people can write off qualifying charitable contributions if they itemize their tax deductions. But the ultra-wealthy use charitable remainder trusts (CRTs) to use philanthropy as a means for guaranteed income — what Forbes calls having their cake and eating it, too.
Anyone can open a CRT, but they generally don’t make sense with less than $1 million due to the administrative work involved. But for high-net-worth individuals, CRTs shelter assets — anything from cash to businesses — from their taxable estate and make distributions both to the trustor and the trustor’s favorite philanthropic causes.
The grantor can generate an income stream from a CRT for life; and, when they die, the assets pass on to their designated charities tax free.
GRATs: Estate Taxes? What Estate Taxes?
Using a trust to shelter assets intended for charity and dipping into the cookie jar while you’re still alive is small potatoes compared to the big reason that the wealthy use trusts.
According to the investigative journalism nonprofit ProPublica, “More than half of America’s 100 richest people exploit special trusts to avoid estate taxes.”
In 2021, ProPublica outlined how Congress unwittingly created a loophole in the estate tax three decades ago. Those who use that loophole and the fortunes they sneak through remain a secret unless they’re disclosed in lawsuits or securities filings. But ProPublica estimates that trusts that exploit the loophole have cost the U.S. Treasury $100 billion in the previous 13 years alone, “reducing government revenues and fueling inequality” along the way.
The most common is called a grantor retained annuity trust (GRAT), which allows gains on investments like stocks to pass tax free to heirs.
Tycoons such as Michael Bloomberg and the Koch brothers use GRATs to pass tax-exempt billions on to their heirs even though the estate tax calls for a 40% levy on anything over $11.7 million.
IDGTs: A Hiding Place for High-Yield Assets
According to SmartAsset, the wealthiest households commonly use intentionally defective grantor trusts (IDGT) to reduce or eliminate estate, income and gift tax liability when passing on high-yielding assets like real estate to their heirs. Since IDGTs minimize estate taxes while maximizing capital gains taxes, they’re not particularly helpful for sheltering low-yield, high-appreciation assets. But this kind of irrevocable trust protects assets that generate significant revenue over time by removing them from your taxable estate.
The tradeoff is that grantors can no longer access those assets for their own use — at least on paper. IDGTs use intentionally defective legal language that lets the grantor swap the trust’s holdings for other assets of equal value, which reinstates their access to the trust’s original assets.
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