1. Estate Planning: Introduction
  2. Estate Planning: Estate Planning Basics
  3. Estate Planning: Introduction To Wills
  4. Estate Planning: Other Types Of Wills
  5. Estate Planning: Will Substitutes
  6. Estate Planning: Introduction To Trusts
  7. Estate Planning: Marital And Non-Marital Trusts
  8. Estate Planning: Charitable Trusts
  9. Estate Planning: Estate Taxation
  10. Estate Planning: Life Insurance In Estate Planning
  11. Estate Planning: Health Problems, Money Matters And Death
  12. Estate Planning: Conclusion

by Cathy Pareto, CFP®, AIF®

Philanthropy through charitable contributions generates not only goodwill, but also has significant income and estate tax benefits for donors. For wealthy individuals, this may translate into hundreds of thousands of dollars in estate and income tax savings. A great way to accomplish this goal is through the use of charitable trusts.

A charitable trust is not tax exempt, and its unexpired interests are usually devoted to one or more charitable purposes. A charitable trust is allowed a charitable contribution deduction and is usually considered organized as of the first day on which it is funded with amounts for which a deduction was allowed.

Charitable Trust Terminology You Need to Know
Corpus
Corpus is the Latin word for "body". In the case of a trust, the trust corpus is the assets with which the trust was funded. It does not include gains, income, etc. produced by the trust assets.

Donor
The person donating the assets to the charity.

Why Consider Leaving Assets to a Charity?
As a general rule, outright gifts to charity at death are deductible without limit and reduce the taxable estate.

The Charitable Remainder Trust
A charitable remainder trust (CRT) is an incredibly effective estate planning tool available to anyone holding appreciated assets with low basis, like stocks or real estate. Funding this trust with appreciated assets allows the donor to sell the assets without incurring a capital gain. CRTs provide investors with an efficient way to transfer appreciated property, benefit from the charitable income tax deduction and reduce estate taxes while still reaping the benefits of the underlying assets for income purposes.

There are two sets of beneficiaries: income beneficiaries, typically you and your spouse, and the charities that you choose to name in the trust. As the grantor, you will generally receive income from the trust during your lifetime or for a fixed number of years. If you are married and either you or your spouse dies, the surviving spouse continues to receive income. Provisions can also be made to continue making income payments to successor beneficiaries, and the charities will receive the residual principal of the trust when all the other beneficiaries die.

The following are two types of CRT than can be considered:

Charitable Remainder Annuity Trust
A charitable remainder annuity trust (CRAT) is used in situations where the donor wishes to provide a non-charitable beneficiary with a stream of income to last for a specific time period (i.e., for the life of the recipient or for a fixed number of years). If a term of years is used, it cannot surpass more than 20 years. The income stream must represent at least 5% of the corpus each year.

In this type of arrangement, the recipient receives an income tax deduction from the present value of the remainder interest. At the time the period ends, the remainder interest in the property passes to a qualified charity, or it can also remain in trust for the charity. However, the remainder interest is required to be at least 10% of the contributed amount. It should be noted that the donor can make only one initial transfer of property to the corpus and there can be no additions or increases to the corpus in later years.

Charitable Remainder Unit Trust
The charitable remainder unit trust (CRUT) is similar to CRAT with the difference that in the CRUT the donor can make more than one transfer to the trust. The other difference is that once the trust is established, the corpus must pay out a specific amount of income each year, as a fixed percentage of at least 5%. Depending on how the trust is set up, the payments will continue for a fixed period of time or until the death of the beneficiary.

Charitable Lead Trusts
The purpose of a charitable lead trust (CLT) is to reduce the donor's current taxable income. The way this type of trust works is that a portion of the trust's income is first donated to a charity, and after a specified period of time (usually until all taxes are reduced), it transfers the remainder of the trust to the trust beneficiaries. By doing this the beneficiaries will face lower gift taxes and estate taxes. The federal tax deduction you receive from this type of trust will be equal to the estimated value of the annual trust payments to the charity.

You can get a lot of help in setting up these types of trusts from different charities, universities and other organizations that would be interested in getting the income for a few years. A charitable lead trust works best for wealthier, estate tax-conscious individuals, as long as those individuals are willing to defer receiving substantial income and own highly appreciating assets.

Estate Planning: Estate Taxation

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