What Is a Qualified Trust?
Let me explain what a qualified trust is—it's essentially a tax-advantaged setup between you as an employer and your employees, taking the form of a stock bonus, pension, or profit-sharing plan. In this arrangement, the beneficiary can base required minimum distribution amounts on their life expectancy, but you can't factor in things like gender, race, or salary.
Key Takeaways
You need to know that a qualified trust is specifically a stock bonus, pension, or profit-sharing plan that an employer sets up for employees. It remains tax-advantaged only if it meets IRS requirements. When determining benefits, you as an employer can consider employee life expectancy, but you're prohibited from using race, gender, religion, or current pay as factors.
Understanding Qualified Trusts
According to the IRS, trusts fall into qualified or non-qualified categories, and qualified ones come with tax benefits. For it to qualify, the trust has to be valid under state law and have clear beneficiaries. Plus, the IRA trustee, custodian, or plan administrator must get a copy of the trust document. If you don't structure it right, the IRS will tax the disbursements. This is all governed by Section 401(a) of the Internal Revenue Code, which outlines the exact requirements.
There are rules to prevent discrimination in contributions—you can't favor highly compensated employees, for instance. Contributions have to be consistent across the whole organization.
Other Types of Trusts
Beyond qualified trusts, you'll find various other types. Take a charitable lead trust: here, beneficiaries can cut their taxable income by giving part of the trust's income to charity, and after a set time, the rest goes to them.
Then there's the bare trust, where the beneficiary has full rights to the capital, assets, and any income like dividends. The trustee manages things prudently, but they don't decide on distributions.
A personal trust is one you set up for yourself as the beneficiary. These are separate legal entities that can handle buying, selling, holding, and managing property to benefit you, achieving goals like funding graduate school or professional education later on.
Setting Up a Trust
When you're establishing any trust, make sure to consult a trust or estate lawyer. You might also need a custodian for the assets and an investment advisor to manage everything until withdrawal time.
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