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How High Income Earners Use Trusts to Legally Reduce Taxes

wealth tax

There isn’t a good argument yet as to why we should give more money to our governments. You might live in some of the richest and best countries in the world, and yet, they might still demand too much from us. Ludicrous tax rates from our governments have two effects on their citizens.

First, and this is most common, you might get angry. Tax season comes around and you get angry at how much of your hard-earned income is frittered away by an inept government that doesn’t seem to appreciate it. Is this ringing any bells?

Although you might get angry, that’s where it ends. You take no action. You make no changes, you don’t learn how to pay less taxes.  And the government gets your money.

But that’s not the only response to extremely greedy governments. The high income earners in our country take a different approach.

Oh, they still get angry. They don’t believe that high tax rates are fair, and they are just as upset as you. And…

The only difference is that they do something about it. They find ways to legally reduce their taxes. They actively seek out tax structures to save more of their money These high-income earners; doctors, lawyers, plumbers, real estate agents etc., these wealthy people find ways to shelter their money using smart, legal ways to drive down their tax bill.

It’s not that these people are better connected or more financially savvy. They simply wanted to find a way to reduce their tax bills. And they found the solution.

The reality is that tax burdens don’t have to be so big, as long as you’re ready to take a few steps upfront. If you put in the work now and think about your money differently, you can copy the success of the wealthy and learn to keep more of your own money.

This is the family trust. And it’s time you get acquainted with how it works. Unless, of course, you’re 100% satisfied with how well your government handles their money.

No? Didn’t think so. Read on.

How Do High Income Earners Create a Trust?

A family trust is, at its most basic level, a contract to hold on to assets. For a period of time, one party will keep the assets until they pay another party. For a nominal fee, the settlor (lawyer, accountant, tax specialist, etc.) will create this trust. The trustee (usually a person, but sometimes it could be a company) is in charge of the trust’s assets, which might include money, property, and other investments. They have control over the trust but do not own it. When it comes to tax season, this distinction is critical.

So, you have the trustee, the person who sits on this pile of assets. And then you have the beneficiaries (you, your wife, your kids, your church…etc.), or the people getting paid out of the trust. The trustee manages the payments, and you can have as many beneficiaries as makes sense for you. And it really can’t be simpler than that. There are several kinds of trusts, and it’s best to talk with a tax specialist to figure out your ideal option, but a very popular choice is the discretionary trust.

Also known as the family trust.

And here’s why this matters.

How Does a Trust Legally Reduce Taxes? tax

So, we’re already well acquainted with the trustee, who is ultimately responsible for the trust. Remember, they’re the one sitting on all that money before it gets shelled out to the beneficiaries. But the trust isn’t designed to hoard all that wealth.

The problem with a trust is when it’s not paid out in an appropriate time. In Australia, for example, a trust can be taxed over 40% each year if the money isn’t distributed. A trust makes for an awful bank account.

But that’s not how we use it. Keep in mind the purpose of a trust is to hand out the income.

First, one of the best ways to legally slash your tax bill is to distribute your income in a more balanced fashion. If you hold a trust, your beneficiaries can be anybody you choose. Your wife, your kids, your favorite charity – whatever you want. Then, the assets and income from the trust is paid out how you choose. And the way you distribute the assets determines how much tax burden you cut from your income. And it’s all legal and available to anyone.

How does this practically work? The real magnitude of this tax structure is demonstrated after you distribute the money. Timing matters because after you pay out the trust, that’s when the tax bill is assessed.

And that tax bill depends on who you’re paying the assets to. Let’s run through a very simplified example so you can understand how dramatic this savings can be.

Let’s meet John and Lauren, a doctor and his wife with a considerable income and they would like to legally reduce their tax bill. In John’s practice, he earns around $100,000 a year.

tax bill for doctors

John and Lauren have decided to use a family trust system to distribute John’s income. Right off the top, they make a generous $10,000 donation to a government registered charity. That donation is tax-free and becomes a handy deductible on their income. Most countries offer a tax-deduction for charitable giving. If you’re unsure how to proceed, it might be best to speak with an experienced accountant about your options where you live.

Lauren doesn’t have an income, and in this case, that is a major benefit to helping offset their tax bill. In fact, these high-income earners have legally reduced their taxes by using a simple trust distribution scheme.

  • They distribute $60,000 to John.
  • Lauren receives $30,000 from the trust, which is hardly taxed at all since she has no other income.
  • They have already made their $10,000 charitable contribution.

And the best part is that less taxes are lost to the government.

John would be taxed $13,500 for his $60,000 income. The $30,000 Lauren gets taxed at the close to 30% (at least, In Australia), making another $9,000 tax payment. The $10,000 is tax-free when paid to proper charities.

The total tax bill? $22,500, and although that sounds steep, that simple tax structure saved them over $20,000 in lost taxes. I mean, in other words, that’s a $20,000 raise each year, and it cost John and Lauren very little to establish.

Everyone’s happy in the end. Well, John and Lauren are happy. I’m not so sure about the taxman in this scenario. But they’re already getting enough.

This is only possible because the family trust allows taxes to be taken out after the income is distributed.

This is just one of the many ways that high-income earners use trusts to slash their tax bills, legally! Nobody wants to see their money frittered away. Nobody loves their tax bill. Isn’t it time to do something about it?

Now you can.


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