Legally Speaking: Estate Planning and You, Part III
In the Charitable Remainder Trust (either a Charitable Remainder Annuity Trust (CRAT) or Charitable Remainder Unitrust (CRUT)) a donor makes a deferred charitable gift to an irrevocable trust. The donor receives an income tax deduction for the year the trust is established. When the donor dies, the estate receives an estate tax deduction at the time of death. The donor keeps the right to an annual annuity or unitrust payment for a number of years, for life or for the lifetime of some other named beneficiary, and the charity receives the remainder of the trust when that period terminates. This allows the charity to benefit and the donor to keep an income stream from the property. Another benefit is that the charity can sell the asset in the trust and replace it with other, perhaps more rapidly appreciating assets. This would give the donor the advantage of an increased income stream and allows the charity to diversify without paying additional taxes.
The Charitable Lead Trust is the opposite of the Charitable Remainder Trust. In this situation, the donor creates an irrevocable trust and gives the income interest to the charity and the remainder is given to a child, grandchild or other beneficiary. This may have the effect of reducing the gift or estate tax value of the remainder interest to the beneficiary. If there is a great amount of appreciation in the value of the assets placed in the trust and the amount of appreciation exceeds the discount rate used to compute the value of the charity’s interest, then the excess appreciation passes to the beneficiary free of estate or gift tax. This can make the Charitable Lead Trust very appealing where there are substantial rapidly appreciating assets that the donor wants to remain in the family.
The name “charitable trust” can be a bit misleading. The donation can be to any entity that qualifies under Section 501 of the Internal Revenue Code. Many organizations and businesses one would not normally think of as charities have established branches that qualify under the IRS rules as charitable organizations.
Please remember that most states have very specific laws regarding estate planning. The subject of estate trusts is especially complex and confusing, and the ramifications of properly creating a trust are far reaching. The information contained in this article should not be construed or relied upon as legal advice. Contact an attorney in your area that is familiar with estate planning.
In the next issue, we will zero in and discuss the basic aspects and parts of a will.