Philanthropically minded individuals, particularly those who have been successful in business or investing, often face a dilemma. On the one hand, they would like to make substantial gifts to a charitable organization or educational institution – perhaps the college or university that gave them the tools to prosper. On the other hand, they may still need some level of income for living expenses, traveling, or other personal purposes. With some careful planning and the use of charitable remainder trusts, one can have one’s cake and eat it too.
A charitable remainder trust is an irrevocable trust created pursuant to § 664 of the Internal Revenue Code. Properly drafted, the trust is a vehicle through which the donor can transfer low-basis, high-value property out of the donor’s estate, without recognizing any gain (or loss), while at the same time allowing the donor to retain an income stream. That income stream is also enhanced by the charitable deduction that is allowed for the transfer. The value of the charitable deduction is determined through a complicated process that takes a number of factors into consideration, including, but not limited to, the donor’s age, the payout rate, and prevailing interest rates.
Generally, there are two types of charitable remainder trusts:
The essential difference relates to the recurring payments made from the trust to the donor. In a CRUT, those payments represent a percentage of the fair market value of the principal of the trust. That principal, by the way, is revalued on an annual basis. In a CRAT, the payments represent a fixed percentage of the initial value of the principal.
All things considered equal, many older donors decide that the CRAT is a more appealing choice, since the income stream is a more predictable. Younger donors typically prefer the CRUT. Bear in mind that annual distributions from a CRUT must amount to at least five percent – but not more than 50 percent – of the trust principal, revalued annually. Annual distributions from a CRAT must be at least five percent – but no more than 50 percent – of the initial value of the donated assets.
Some donors find the income flow opens up a number of other opportunities. For example, depending upon the size of that flow and the age of the donor, one might fund an insurance trust with the CRAT or CRUT income. That way, one’s heirs have a long-term source of support that isn’t subject to probate. Note, however, that in many instances, the value of the insurance would still be considered an asset for estate tax purposes.
There are some important limitations on the creation of a CRAT or a CRUT. One important one: The donor may not fund the trust with “S Corporation” shares. In many cases, mortgaged real estate will not qualify as an appropriate asset for either form of trust. Designing a viable trust arrangement takes some planning and, in most cases, one is best served by retaining an attorney who is skilled in wealth management, estate planning, and related issues.
Charitable remainder trusts can be useful in meeting an individual’s long-term estate planning goals. They can also be invaluable in your tax planning. Generally speaking, they are not “stand-alone” instruments; they should be used in conjunction with a properly drafted will and related trust documents. They can allow a successful individual to enjoy some well-deserved recognition through the charitable gift process, and yet still provide some measure of security for either the donor or his or her heirs.
The attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of estate planning. We have developed many successful estate plans, some of which have included charitable remainder trusts that meet the specific and unique needs of our clients. At Romano & Sumner, we pride ourselves not only upon our professionalism, but also upon our client service. We know that each estate planning situation is unique. We keep clients informed. We complete the work within the allotted time frame. We return your calls within 24 hours. We’re ready to assist you as you make the important decisions that affect your family and your honored institutions. Call us at 281-242-0995 or complete our online contact form.
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