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Trust Your Children or Trust a Trust

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by Bill Hurd '61

Are you planning to leave an inheritance to your children or other heirs? If so, what do you want to accomplish for them? Do you want them to have a great time and spend their inheritance in a couple of years, as many heirs do? Or do you want to provide lifetime security? Personally, I hope that I can accomplish some of both.

If you want to provide security for your heirs, do you trust them to manage their inheritances towards this end? If not, you have probably considered one or more trusts. If you are considering a trust, you may wish to consider a charitable trust. As you know, your assets can go to three places: your heirs, taxes and charity. Charitable trusts reduce the share that goes to taxes, leaving more for your heirs and charity.

I have studied charitable trusts extensively, and I have personal experience with standard non-charitable trusts. I have decided that charitable trusts are better for my family. A charitable trust can provide lifetime income for my children and their spouses. It can also provide some income for my grandchildren for a number of years. And my charitable trust will eventually leave a legacy for needy and deserving Clarkson students.

I like the flexibility of a charitable trust. If you want the trust to provide income for a long period of time, you can select the lowest allowable payout of 5% per year. But you could choose a higher percentage payout if you want to provide higher income for an elderly heir. Alternately, you could adjust the expected amount that the charity will receive, provided that it meets the minimum required 10% remainder. You do this by adjusting the annual payout for the life expectancy of the heir(s). But use caution, choosing a high percentage payout will deplete the principle of the trust, thereby reducing the annual payouts over time.

I like the tax benefits of charitable trusts. At the time the trust is funded, there is an immediate tax deduction for the value of the share that eventually goes to charity. If the trust is funded with assets that have unrealized capital gains, the capital gains tax is avoided. Perhaps most importantly, there is no tax on any gains within the trust over time. This last tax benefit gives charitable trusts a big advantage over other trusts in preserving and growing assets so that heirs are likely to get more from a charitable trust.

I like that you can name a charitable trust as the beneficiary or contingent beneficiary of a retirement account. There are two big advantages compared to leaving an IRA to your heirs. First, the heirs cannot take the money and run; instead they get lifetime income. Second, the heirs don’t have to take minimum distributions according to the rules for IRAs; instead they get lifetime income.

Finally, I like that charitable trusts do not have to be extremely large. For typical non-charitable trusts, the annual fees charged by the trustee can be quite high, especially for small trusts. When Clarkson is both the trustee and the charitable remainderman, it works with BNY Mellon to provide all the services of the trustee, such as managing investments, preparing tax returns and making disbursements. BNY Mellon bases its annual fee on the total amount it manages for Clarkson, which results in a low percentage of annual expense, even for relatively modest trusts.

Read Bill's article, "Family First with a Charitable Trust"                         
Read Bill's article, "Take Care of Yourself First"                                        
Read Bill's article, "Retirement Income for Financial Conservatives"     
Read Bill's article, "A Charitable Trust Might be for You"
Read Bill's article, "Charitable Giving May Be Easier Than You Think"
Read Bill's article, "Do You Have a Tax Problem?"
Read Bill's article, "Why and How We Give to Clarkson"

Footnote: Bill Hurd passed away in 2016.  This article is published in thanks and admiration to a loyal Clarkson alumnus.

(rev. 12/2016)