Income Trust

Do you have any assets that don’t pay well and you wish you could convert to income?

You can, while also avoiding the capital gains tax.  For example, let’s say you have some raw land or stock that pays no dividend.  You can use an Income trust to convert this asset into another asset that pays income to you.  Here are the steps:

1. Your attorney draws up an income trust
2. You transfer your asset that pays low or no income to the trust
3. The trust sells the asset (the trust pays no taxes)
4. The trust reinvests into investments that pay income—immediate annuities, bonds, preferred shares, etc
5. You receive income

There is one catch to this beautiful arrangement.  At least 10% of your original transfer to the trust must eventually pass to the charity of your choice (at the end of your life or your children’s lives).  That’s why this is often called a Charitable Remainder Trust.  But many people make the mistake thinking they must leave large amounts of assets to charity when only 10% is required.

Any financial advisor or estate planner can help you put this together and increase your income.  There is also an income tax saving involved which your planner can explain.

Other Income Alternatives

Can Real Estate Increase Your Income?

Have lower interest rates and the reduction of corporate dividends caused a drop in your income?  If so, you may want to consider including real estate investment trusts (REITs) as a portion of your portfolio.

Congress created REITs in 1960 as a way for all investors to own large-scale, income-producing commercial real estate.  REITs are similar in concept to mutual funds in that they use professional management to oversee the investments.  The difference is that REITs use a diversified portfolio of income-producing property or mortgage loans instead of stocks or bonds.

REITs offer:

An attractive dividend yield: REITs must pay out 90 percent of their taxable income as dividends to shareholders.  In exchange for this high payout, REITs do not have to pay corporate income tax.  This results in higher dividends than many stocks and bonds.

Predictable income: Rental income is the prime source of earnings for REITs.  This income is often locked-in by long-term leases with tenants and can add to the stability of the REIT.  However, the lengths of the leases depend on the types of properties owned.  For instance, storage facilities are rented out month-to-month, whereas industrial buildings are often leased out for 10 or 20 years.  Of course, economic conditions will affect occupancy rates and rental income.

Tax benefits: You might not have to pay tax on all the income you receive from a REIT, since a portion of that income could be a partial return of your investment principal.  This would reduce the cost basis of your investment.

A hedge against inflation: Rents generally rise with rising prices.

A unique asset class: The real estate market tends to move in different cycles than the financial markets.  Therefore REITs can provide a hedge against the volatility and under performance of other assets.

Liquidity: Because REITs are traded on the major exchanges their shares are easily bought and sold.

Remember that REITS are shares and can fluctuate as much as any other stock and there is no guarantee of profit or a continuing dividend.