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.