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What Is a Perpetual Trust?

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  • Written By: Emma G.
  • Edited By: Melissa Wiley
  • Last Modified Date: 19 August 2014
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A trust is a way of setting aside money to be used for the benefit of a certain entity, person, or group of people known as the beneficiaries. This money is managed by a trustee who may or may not be the beneficiary. A perpetual trust is a type of trust that passes from generation to generation so that the children of the original beneficiaries can also benefit from the trust. Trusts are often used as a legal way to avoid taxes and keep money and property from being taken by creditors in the event of legal trouble.

A trust is created when one person, sometimes called the originator, names one or several beneficiaries. These are often children of the originator, but they can also be other family members or even charity organizations. A manager is chosen for the trust, called a trustee. This person can be a friend or family member, but can also be a lawyer, attorney, or accountant. The income and principal created by the trust are used for the benefit of each named beneficiary.

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In a perpetual trust, the named beneficiaries receive income and principal payments for as long as they live, and the benefit continues to their children after the death of the named beneficiaries. The same rules and conditions apply to second-generation beneficiaries of a perpetual trust as applied to the first generation. This process continues until the perpetual trust runs out of assets or until the long-term legal limit has run out.

In the United States, not all states allow the creation of a true perpetual trust. Some require a expiration date of 150 to 1000 years, but that is long enough to be considered practically perpetual, as it will be passed down through several generations. Most states that allow perpetual trusts do not require the creator of the trust to be a resident of the state in order to create the trust.

A trust is similar to a will in that it allows the owner of the property to name who will have use of her property after she dies. The benefit of choosing a trust over a will is that less of the money will be tied up in legal fees and taxes and so more will be left to the person who inherits the property. The other benefit is that the money cannot be taken by creditors. If the beneficiary of the trust goes into bankruptcy or defaults on loans, the trust assets cannot be taken to pay off debts.

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Soulfox
Post 3

@Vinzenzo -- Well, think about this. Quite often, that cash was taxed as income when it was distributed to the person who earned it and set up the trust to protect it. How fair is it to tax the same dollars over and over again when all they do is pass from one generation to the next?

Besides, there are sales taxes paid on cash, property taxes paid on land and homes and a lot of other taxes that will be covered. We are just talking about paying income taxes here and I don't have a problem with that because the cash at hand was already taxed as income once.

Vincenzo
Post 2

@Logicfest -- But how fair is it that a family that has a ton of money can escape tax liabilities when the cash passes from one generation to the next? Shouldn't those who inherit that money and did nothing to earn it be slapped with a healthy tax bill so they are paying their fair share?

Logicfest
Post 1

If you are talking about a lot of money, a perpetual trust may be the only way to go. You avoid taxes and the problem of having one generation burn through enough wealth to last for decades or centuries if protected.

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