Whitney Ganyon and Mary Susan Leahy
New Hampshire is a leading jurisdiction in establishing trusts. Since 2004, the New Hampshire legislature has continually updated its trust laws to make trust management more efficient, to provide flexibility based on changing laws and family and financial circumstances, and to improve the protection of creditors that trusts provide.
New Hampshire is one of the few jurisdictions that has legislation specifically authorizing Purpose Credits. Trust purpose deserves consideration when creating an entity to retain ownership of family property for the enjoyment of future generations.
A purpose trust, unlike a traditional trust, does not have identifiable beneficiaries. Rather, it was created for a specific purpose. One of the permissible purposes can be the holding of ownership of family property for the enjoyment of a class of people. For example, a purpose credit can be created to hold property ownership for “X’s descendants.” These descendants may be called “members” of the trust.
Under common law, a non-charitable trust without a beneficiary was unenforceable because no beneficiary could enforce the trustee’s obligations. The New Hampshire Trust Act addressed the shortfall in beneficiaries by providing that the trust may be enforced by a person specified in the trust agreement or by court.
New Hampshire common law cannot be a permanent trust. This rule is used to provide that an interest in a trust must pass no later than twenty-one years after the death of a person alive at the time the trust is created. Under current New Hampshire law, a trust originator may create a “permanent trust” or “dynasty trust” to benefit many future generations without a time limit.
Purpose chests are especially useful for maintaining a cabin, camp, family cottage, or larger family lodge or lodge. They can be useful for other purposes as well, such as running a private company, publishing manuscripts of a deceased author, or preserving a collection of artifacts. Trust terms can provide family members with definite decision-making power while providing direction and structure to enhance the management and success of the business or property and to ensure that the business or property is not evaded from the original owner’s vision.
The Purpose Credit is a tax-advantaging planning tool that allows multiple generations to enjoy the benefits of family assets while reducing the tax burden of trust assets and eliminating the need for future property assessments and tax returns by descendants.
The originator of a purpose fund typically obtains a qualified appraisal and file a gift tax return when title is transferred to the purpose fund, with some of the gift and estate tax credit amount applied to the transfer by filing a federal gift tax return. In this way, the trust builder transfers assets from its property to the trust’s purpose of today’s value and removes the future appreciation of assets from its taxable property. Furthermore, since the trust has no beneficiaries, no appraisals or interests are required in the trust to be included in the estate of descendants upon their death. New Hampshire does not have a separate estate tax in the state of New Hampshire.
A purpose fund has its own Tax Identification Number (TIN). The trustee typically files an annual Federal Income Tax Return (1041) if his or her income exceeds $600 annually. Unlike a traditional trust, trust income is taxed at the trust level and the K-1 is not sent to grandchildren. This makes tax returns easier for the tax preparer, trustee, and branches.
A purpose credit can provide a mechanism for creating an endowment for a property. New Hampshire will charge interest and tax on dividends if the trust is granted.
While the federal income tax rate can be higher for taxable assets at the trust level than at the individual taxpayer level, the possibility of paying at higher income tax rates must be compared with the increased operational efficiency of a purpose fund. Intent trust agreements are often easier to craft and shorter in length than traditional trust agreements. While it is not maintenance free for the trustee, record keeping can be much easier. There are no beneficiaries to track and submit K-1’s to, no complicated records of transfer of interests by beneficiaries and no need for assessments and tax returns upon the death of each descendant.
In short, mutual funds can be an attractive and tax-effective option for moving cherished huts, cabins and campgrounds for the enjoyment of future generations.
Whitney Gagnon and Susan Leahy are attorneys in Maclean Middleton’s Funds and Real Estate division. Whitney can be reached at (603) 334-6927 or firstname.lastname@example.org. Susan can be reached at (603) 334-6926 or email@example.com.
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