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CHARITABLE
REMAINDER TRUSTS
Sometimes Gifting Can Yield More
By Douglas R. Jackson
Charitable gifting of a highly appreciated asset such as a stock or farmland
often can yield positive income results for both the giver and the recipient
charity. Many times, a family is reluctant to sell such an asset because
of the capital gains tax that would be due when the asset is sold. The
asset is typically a low yield or low income-producing property. The owners
of these types of assets would like to convert them into an income for
retirement, but are reluctant to do so because of adverse tax implications.
The above situation may have a remedy that is widely accepted and gaining
in popularity - The Charitable Remainder Trust. The advantages are that
the asset may be transferred to a trustee of a trust who can sell the
property without the burden of paying capital gains tax, and the trustee
then can provide an income payable quarterly, monthly or yearly to the
maker of the trust, thus converting a low basis stock or piece of real
estate into an income-producing asset. On top of this, the grantor, the
person who makes the trust, can qualify for a charitable tax deduction
for the current year in which the gift is given based on the giver's life
expectancy, the amount of the gift that will eventually pass to charity,
the type and value of the assets, and the applicable federal rate. The
charitable donation is normally limited to 30 percent of adjusted gross
income, but can vary from 20 percent to 50 percent depending on the class
of charity as defined by IRS regulations. If you cannot use the full deduction
in one year, the deduction can be carried forward for up to five years.
At the death of the grantor, or a successive life as determined by you,
the remaining Trust assets go to your specified charity or charities.
The individuals making the trust, the grantors have options as to their
income choices. They may select a percentage of the trust, in which case,
the annual income received will be determined by the investment performance
of the Trust. This type of charitable trust is called a Charitable Remainder
Unitrust. The advantage is that additional funds may be later added to
the trust. The assets may grow quickly if well managed since they grow
tax-free. If certain assets, like land or closely held business stocks,
are put into the trust, they may not be readily marketable, so income is
difficult to pay. Special wording may be put in the Trust that would pay
the lesser of the income earned so that any difference may be made up
in a better year.
One might also opt for a guaranteed income. A trust providing a guaranteed
income would be called a Charitable Remainder Annuity Trust; no matter
how the Trust assets perform, a definite income will be paid. Many times,
older clients will opt for this type of trust.
Trust income may be paid to the grantor, the grantor and spouse, or, after
their death(s), to their children for their lives. The longer the Trust
lasts; however, the lower will be the charitable tax deduction. It is
possible to set up the Trust now, and delay taking the income until later.
Hopefully, with good financial guidance, the trustee will see the growth
in value of the Trust assets, which may mean significantly higher income
to the grantors during their lives, and a greater remainder amount left
to charity.
Since the remaining Trust assets will eventually go to charity, the question
often arises as to how to replace your children's inheritance. Fortunately,
there is an easy way to do this. You may wish to apply a part of the income
tax savings that would be generated due to your charitable tax donation
to fund an irrevocable life insurance trust. Typically, this is accomplished
with an inexpensive second to die policy, which is based on the lift expectancies
of the grantor and spouse, or, another person. Since, actuarially, the
life expectancy is spread over two lives, the premiums are much lower
than they would be only on one person's life. Because the irrevocable
life insurance trust is the owner of the policy, the proceeds are removed
from the grantor's estate for estate tax purposes. The beneficiaries will
receive the proceeds free of tax. Keep in mind that every dollar spend
on premiums may qualify for the annual exclusion for gift taxes, and that
every dollar of premium will buy several dollars of insurance. Thus, estate
taxes may be avoided, and the proceeds will be free from probate and taxes.
Implementation of Charitable Remainder Trust results in creating a winner
for everyone - grantor and spouse, their children, and the charity or
charities they select. In summary, it is possible to convert a low yielding
asset or piece of land that has appreciated in value into a lifetime income,
avoid capital gains tax, receive a charitable income tax deduction, reduce
or eliminate estate tax liability, leave more for the grantor's children
through a replacement insurance trust, and also benefit your favorite
charity. Charitable trusts, in order to qualify for a qualified estate-planning
attorney who has expertise in this area should draft all of these benefits.
IRS regulations are very strict and must be clearly adhered to. Sound
financial advice from your financial advisor should be sought. Douglas
R. Jackson is an attorney in private practice that emphasizes estate planning
in the central Ohio area.
two lives, the premiums are much lower than they would be only on one
person's life. Because the irrevocable life insurance trust is the owner
of the policy, the proceeds are removed from the grantor's estate for
estate tax purposes. The beneficiaries will receive the proceeds free
of tax. Keep in mind that every dollar spend on premiums may qualify for
the annual exclusion for gift taxes, and that every dollar of premium
will buy several dollars of insurance. Thus, estate taxes may be avoided,
and the proceeds will be free from probate and taxes.
Implementation of Charitable Remainder Trust results in creating a winner
for everyone - grantor and spouse, their children, and the charity or
charities they select. In summary, it is possible to convert a low yielding
asset or piece of land that has appreciated in value into a lifetime income,
avoid capital gains tax, receive a charitable income tax deduction, reduce
or eliminate estate tax liability, leave more for the grantor's children
through a replacement insurance trust, and also benefit your favorite
charity. Charitable trusts, in order to qualify for a qualified estate-planning
attorney who has expertise in this area should draft all of these benefits.
IRS regulations are very strict and must be clearly adhered to. Sound
financial advice from your financial advisor should be sought. Douglas
R. Jackson is an attorney in private practice that emphasizes estate planning
in the central Ohio area.
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