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Charitable Remainder Trusts

What IRS rules govern the Charitable Remainder Trust?

Section 664 of the Internal Revenue Code provides the primary governing rules for the CRT.

Who could benefit from a CRT?

Those with appreciated assets wanting to increase income, reduce their taxes, and have charitable interests would most benefit from a CRT.

Can I have the income go to my children or other persons?

Yes, a CRT can provide income for a donor’s life plus for a term of years (not to exceed 20 years) or children’s lives, whichever is less. There may be some gift tax implications to this plan. The use of an Irrevocable Life Insurance Trust in conjunction with the CRT would serve the same inheritance purposes while keeping the asset out of the donor’s estate.

Can I be my own trustee?

Yes, a donor can be his own trustee. It may be wise, however, for a donor to be a co-trustee with someone that has experience in the areas of trustee’s responsibilities such as investments, accounting and taxation.

How is the tax deduction calculated?

An IRS formula is used to determine the “future value of a present gift.” This formula takes into account the donor’s age and the payout percentage chosen by the donor (which determines the income to be paid to the donor). This will show the future value to your charity in today’s dollars. The deduction can be used in the year of the gift plus 5 years carry forward. If appreciated assets are used, the donor may deduct up to 30% of adjusted gross income. If cash is used, the donor may deduct up to 60% of his adjusted gross income.

What about using other assets besides cash or stocks to fund a CRT?

Most any asset, without encumbrance, can be transferred to the CRT. An exception would be IRAs and Annuities. Caution is in order and assistance is usually needed in transferring such assets as real estate, closely held stock, and other assets because of special valuation rules, appraisals, reporting forms and tax implications.

Can more than one charity be named as a charitable beneficiary of a CRT?

Yes, multiple charities can be named as beneficiary of a CRT provided they are qualified with the IRS. This is possible even after you establish the trust, if you reserve the right to do so in the document.

Are there ongoing costs with a CRT?

Generally there is an annual filing of a tax return and other tax forms. There is a need for annual valuations for any type of unitrust and charitable deduction calculations must be generated. Also, accurate records are imperative concerning the complex four-tier payout system for your trust. YTA provides this important service at a very reasonable annual fee. 

How am I taxed on the income?

The type of income the trust earns is paid out to you in a specific order:

  1. Ordinary income

  2. Capital gains income

  3. Tax free income

  4. Return of principal

Are contributions to the CRT revocable or irrevocable?

The assets are irrevocably transferred to the CRT. The IRS will allow the avoidance of capital gains tax and a current income tax deduction only if there is an irrevocable guarantee that some time in the future a gift will be received by a qualified charity.

When will I receive income from the trust?

Income payout begins almost immediately. The payment to the donor can be monthly, quarterly, semi-annually or annually. However, income can be deferred by using the NIMCRUT version of the Charitable Remainder Trust.

What is the minimum payment that I can take from my trust (in order for the principal to compound)?

The IRS requires that the income beneficiary take no less than 5% of the annual fair market value of the trust. If the donor has a net income with makeup trust, the actual income received may be less than 5% if the assets are invested in growth assets.

Can I transfer part of a particular asset into the CRT?

Yes, you can put an undivided interest in debt free real estate into a CRT.  The Charitable Remainder Unitrust is an “open box”. You may choose to fund only a part of your appreciated assets into the trust. At a later time you may fund additional assets into the trust. This will add to your income and give a new charitable deduction.

Charitable lead Trusts

How is a Charitable Lead Trust different from a Remainder Trust?

The Charitable Lead Trust (CLT) pays income to the charity first with the trust principal coming back to the donor or the family, depending on the type of CLT.

How does a Grantor Lead Trust benefit my client?

The Grantor Lead Trust provides a large up-front income tax deduction for the present value of the total payments to charity over the life of the trust.

How is the income from the Grantor CLT taxed?

The income from the Grantor CLT is taxed to the Donor. The proper investing of the trust assets will mitigate the tax effect to the client. Many times a combination of tax free investments and growth investments are used to make a more tax efficient payout to minimize the Donor’s taxes.

Who are good candidates for a Grantor Lead Trust?

The type of income the trust earns is paid out to you in a specific order:

  1. Clients who have already experienced the sale of a piece of real estate, the sale of a business or are exercising stock options are good Grantor Lead Trust cases.

  2. Have cash because of the tax event/sale.

  3. Have other assets to live on.

  4. Want the trust back.

How can a Non-Grantor Charitable Lead Trust help avoid federal estate taxes?

The Non-Grantor CLT pays income to charity for the donor’s lifetime or, more commonly, for a term of years. The cumulative payments to charity represent a present value estate tax charitable deduction against the estate tax. With proper investing, the family should have more value left to the heirs than what would be left over after paying estate taxes without a CLT. If this is set up and funded during life time, it would be a Gift tax deduction.

Is there a minimum payout or term for the Charitable Lead Trust?

There is no minimum or maximum payout or term for the Charitable Lead Trust.

Is the Charitable Lead Trust a tax exempt trust?

The CLT is not tax exempt. It is a taxable trust. Usually highly appreciated assets are not put into a CLT unless the Donor does not plan to sell the assets. The trust would recognize capital gains at the trust level if highly appreciated assets were sold in the trust.

Can you add to a Charitable Lead Trust?

The Unitrust version of the CLT can be added to but the Annuity Trust version cannot have additional contributions.

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