Charitable Trusts

Charitable Trusts2018-08-31T13:49:38+00:00


The benefits of creating a Charitable Remainder Trust can include the following:

  • The Trustmakers win by: (a) gaining a lifetime income, while avoiding capital gains tax upon the sale of appreciated assets; (b) obtaining an immediate income tax deduction that can be carried forward for up to five years; (c) achieving a possible estate tax savings; and
  • (d) creating a wonderful opportunity to accomplish their charitable dreams;
  • The Trustmaker’s chosen charities win by being the recipient of the Trustmaker’s philanthropy; and
  • Society wins because charities will promote social good and wisely use “social capital.”

If any of these benefits sound intriguing, then the Charitable Remainder Trust might be just the answer to your estate planning needs.

A Charitable Remainder Trust (CRT) is a special type of irrevocable trust in which the assets donated to it are shared between the Trustmakers and charitable beneficiaries. Typically, a CRT pays income to the Trustmakers for a number of years (or even the Trustmakers’ entire lives), after which any remaining principal is paid to qualified charities.

Charitable Remainder Trusts offer you the ability to benefit from the sale of property that you might otherwise be hesitant to sell because of the capital gains taxes that would be due. CRTs are the result of special legislation that is intended to promote charitable giving by making it possible for you to gift highly appreciated assets (i.e., publicly traded stock, real estate, etc.) to a CRT capital gains tax-free. In turn, the trust provides an agreed upon annual income back to you, the Trustmaker. Additional benefits to you include an income tax charitable deduction as well as potential estate tax savings, because the assets are removed from your taxable estate once they are transferred to the CRT.

A CRT is usually superior to an outright sale of assets. The capital gains tax-free sale of an asset to the CRT means that its entire value is working for you—not just the amount left over after the taxes are paid. Once the additional charitable income tax deduction and estate tax savings are factored in, the tax savings can be spectacular.

A CRT should be considered an important planning option anytime the owner of an appreciated asset would like to sell it tax-free in order to obtain more income. The income provided by a CRT can be paid monthly, quarterly, or annually and, among other possibilities, used to increase your standard of living, provide for your retirement, assist elderly parents, fund a trust for a special needs child, or help your grandchildren go to college.

Many of our clients have built up sizable estates through a lifetime of saving their hard earned money and living frugally. The newly available income provided from their CRT gives these couples the opportunity to remodel their home, buy that new car, go out more frequently, or take that long delayed vacation.

If you are not able to make contributions to individual retirement accounts or other retirement plans, you can still use the tax-exempt status of a CRT to build for yourself the equivalent of a retirement plan.

For example, let’s say that you are fifty-five years old and own stock for which you paid very little. It is now worth a substantial sum, but yields almost no income. If you sell the stock, you will owe capital gains taxes on its entire increase in value. This will leave less for you to reinvest for your retirement when you will need additional income. After careful thought and study, you decide to give the stock to a CRT. The trust can sell the stock without paying taxes on the gain. Since the entire value of the stock will be available to invest, you will receive more yearly income for the rest of your life than if you had sold the stock and reinvested the balance. As an additional benefit, you will receive a charitable income tax deduction that can be used to offset some of your other income.

As our population ages, many working families are finding it necessary to save not only for their own retirement but also for the possibility that they will have to provide some financial assistance to their parents. Such assistance is not tax deductible and may result in gift tax consequences if it exceeds certain amounts. A CRT offers a simple solution to this dilemma. You can transfer assets to a CRT that will provide a fixed income for life to an older relative instead of income for yourself. You will be entitled to a substantial charitable deduction for your gift to the trust and also be assured of proper management of the assets in the event you become unable to manage them yourself. At your parent’s death, the trust ends and the assets will be distributed to your favorite charity—perhaps even in your parent’s name.

We are all faced with the rising cost of education. Every year those costs are increasing faster than inflation making it more difficult for parents to afford a quality education for their children. One solution to these escalating educational costs is for parents or grandparents to establish a CRT in which the income is used for a child’s or grandchild’s education.

If you give money directly to your children or grandchildren for their college expenses, the gift will not be tax deductible and it may even be subject to gift taxes. If you create a CRT, you will receive an immediate income tax deduction for the assets transferred to it because when the trust ends, any remaining assets will be distributed for charitable purposes.

For example, assume you have a grandchild who will be starting college in a few years. Also assume that you own stock purchased many years ago that has increased substantially in value, but pays only small dividends.

You could sell the stock, pay the capital gains taxes, and then gift the remaining proceeds to your grandchild to pay for college. The gift, however, will not be tax deductible, it might be subject to gift taxation, and you will lose control over how your grandchild uses the money.

A wiser option might be to transfer the asset to a charitable trust designed to produce income for your grandchild’s education. In this happier scenario, you will be entitled to a tax deduction for the transfer because the trust will last only a few years (up to the year of the budding scholar’s anticipated college graduation) after which the remainder will be distributed for charitable purposes.

The CRT will then sell and invest the asset gift tax-free. Each year, according to your instructions, the CRT will pay a fixed amount only for your grandchild’s education. After your grandchild graduates, your CRT will make your charitable dreams a reality.

Although a CRT is an excellent planning tool that can increase one’s income, avoid unnecessary taxation, and achieve one’s charitable planning dreams, one question that is frequently raised concerning them, usually by the Trustmaker’s children, is “What about our inheritance if everything in the CRT gets distributed as income or is left to a charity?”

It is not uncommon for the Trustmaker’s children to view their parent’s desire to create a CRT skeptically for the fear of being disinherited or they may be suspicious that their parent is being unduly pressured by a charity into creating it. Fortunately, these types of objections are easily overcome once the children learn that by establishing the CRT their parents can actually increase the children’s inheritance and enable everyone (parents, charity, and children) to benefit.

The key to achieving this incredible win win win scenario lies in the fact that once the parents have established the CRT, they will be receiving a new stream of income. The parents can deal with the children’s concerns about being disinherited by simply taking a fraction of that income and using it to purchase a new life insurance policy in an amount at least equal to the value of the asset transferred to the CRT.

Often the tax savings and additional income produced by the CRT enable the parents to purchase life insurance (also known as wealth replacement insurance) with a death benefit even greater than the value of the asset being transferred to the CRT. Even better, if the new life insurance policy is owned by an Irrevocable Life Insurance Trust created by the parents, the insurance proceeds will be outside the parent’s estate and thus transferred to the children estate tax free. Most children are also pleased to learn that their inheritance will come in the form of a cash distribution from the ILIT instead of having to deal with selling a major asset after their parents die.

Both Charitable Remainder Trusts and Charitable Lead Trusts (CLT) result in gifts being made to a charity. They differ with respect to the timing of the gift. With a CRT, the Trustmakers receive the trust’s income and the charity receives the assets remaining at the time the trust terminates, which is usually at the death of the Trustmaker or beneficiary. With a CLT the charity receives the trust’s income and the Trustmaker (or the Trustmaker’s selected beneficiary) receives the assets remaining at the time the trust terminates. Recipients of income and assets are reversed with a CLT compared to a CRT.

Assume that you desire to immediately help one of your favorite charities with the income produced by one of your assets (a rental apartment, for example) but you still want to ultimately keep the apartment itself in the family. At the same time you would also like to reduce your estate tax liability. A CRT will clearly not work in this situation. But a CLT might offer the ideal solution to accomplish these goals.

You could place your apartment into a CLT. A named charity will receive the rental income for the lifetime of the trust, after which time your children become the apartment’s owners. Although your children will not receive the apartment building for a number of years, the value of your gift made to them, (for gift and estate tax purposes) must be calculated at the time the apartment is transferred to the CLT.

The value of an apartment received many years from now is not the same as the value of an apartment received today. No one would pay full price today for something they will receive only in the future. Accordingly, your children are entitled to discount the apartment’s current fair market value in proportion to how long they have to wait to receive it.

It is this discounted value of the apartment, instead of its present fair market value, that is used to determine gift and estate taxes on your estate. The result can be a large tax savings to your children. In the meantime, rather than depreciating in value, the apartment building has actually continued to grow in value.

Your charity immediately benefits from the establishment of a CLT and your children will receive an asset that has appreciated in actual value yet has a substantially discounted value for estate tax purposes. Good things are possible for those who take the time to properly plan their estates! Your estate planning attorney will be able to help you determine whether a CRT or a CLT is an appropriate estate planning option for you.

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