Qualified Trust

A qualified trust is a tax-advantaged fiduciary relationship between an employer and an employee in the form of a stock bonus, pension, or profit-sharing plan. In a qualified trust, the underlying beneficiary may use his or her life expectancy to determine required minimum distribution (RMD) amounts. Section 401(a) of the Internal Revenue Code authorizes and sets forth the requirements for a qualified trust.

To be qualified, a trust must be valid under state law, is occasionally irrevocable, and must have identifiable beneficiaries. Furthermore, the IRA trustee, custodian or plan administrator must receive a copy of the trust instrument. If a qualified trust is not structured correctly, disbursements will be taxable.

Stipulations exist to be sure that an employer does not discriminate among employees when contributing to a qualified trust. For example, an employer may not discriminate in favor of employees that are more highly compensated. It’s critical that contributions and are proportionate to compensation and uniform across an organization.

A myriad of trust types exist, with a qualified trust being just one. In a charitable lead trust, for example, beneficiaries are able to reduce their taxable income by first donating a portion of the trust's income to charity. After a specified period of time, the remainder of the trust is transferred to the beneficiaries.

A bare trust is a second example. In a bare trust, a beneficiary has an absolute right to the capital and assets within the trust, as well as the income these assets generate, such as dividends. While a trustee will often bear responsibility for managing the trust assets in a prudent manner, the trustee does not determine how or when the trust's capital or income is distributed.

A personal trust is a common type of trust a person sets up for himself or herself as the beneficiary. As separate legal entities, personal trusts that have the authority to buy, sell, hold and manage property for the benefit of their trustor and can accomplish a variety of important objectives. For example, a young adult may set up a personal trust to pay for a graduate school program or professional education down the line (a 10+ year time horizon).

When setting up any trust, it is important to seek the support of a trust or estate lawyer, potentially a custodian to hold the assets, and even investment advisors to manage them until it is time for withdrawal.