Within the context of estate planning, charity can come in many forms
Many people considering estate planning want to incorporate charitable contributions in their estate plan. Many also wish to shield estate assets from taxation. In addition, they may wish to benefit from a tax deduction for charitable contributions and save on capital gains taxes that would be levied on appreciated property.
There are two basic irrevocable trusts that can achieve those goals: Charitable Lead Trusts (CLT) and Charitable Remainder Trusts (CRT). Depending on a person's objectives, either can be highly beneficial to an estate.
With a CLT, assets are placed in the trust, and the designated charity receives an annual distribution for the term of the agreement. As such, CLTs permit a donor to see the charity benefit during his or her lifetime. At the conclusion of the term of agreement, which might be 10 or 15 years, the remaining assets are left to noncharitable beneficiaries that the client has designated (typically his or her children). As a bonus, the beneficiaries receive the post-trust assets free of gift tax and estate tax inclusion.
A CRT's arrangement is basically set up in reverse. In a CLT, the designated charity obtains distributions first. Then, noncharitable beneficiaries get the remaining assets at the end of the trust’s term. During the term of agreement of a CRT, the donor or the donor’s beneficiaries receive income for life or for a fixed period not to exceed 20 years. At the conclusion of that term, the remaining assets are transferred to the designated charity.
CRTs are often utilized when significantly appreciated assets would generate huge capital gains tax exposure if sold. With a CRT, assets are sold after being transferred into the trust. No tax exposure results because the assets will ultimately go to a tax-exempt organization. The full net proceeds are then invested to provide the donor with decades of income.
CRTs offer two variations. One is a Charitable Remainder Unitrust, in which beneficiaries receive a fixed percentage of the trust each year during the trust’s term. The other is a Charitable Remainder Annuity Trust, in which, as the name suggests, a defined amount is distributed every year to beneficiaries during the term of the trust.
Experienced estate planning attorneys like those at Gilfix & La Poll Associates can help determine the best option and create the appropriate charitable trust for a donor.