Charitable Planning Tools for Your Estate Plan

Charitable Estate Planning Tools

There are several charitable tools that are often incorporated into estate plans. These tools also can yield some dramatic tax advantages. They are described briefly below. Because of your interest in LeSEA, we hope you will consider providing a gift to this ministry. That decision, of course, should be based on a belief that it is God's plan of stewardship for you and your estate.

"... but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal." Matthew 6:20

Charitable Gift Annuity

Charitable Gift Annuities are a contractual agreement between a [type] and the charity, in which the charity receives funds and in return promises to make lifetime payments to the [type] or to designated beneficiaries. The charity invests the funds and at the death of the beneficiaries the residuum will pass directly to charity.

When incorporated into estate plans, the testamentary annuity is generally funded with tax encumbered (IRD) assets, and the actual gift annuity agreement is typically structured with a charitable foundation instead of the specific charity. Utilized in this manner the gift annuities can eliminate the IRD tax on these assets, remove a portion of the assets from the estate for tax purposes, and at the same time provide a benefit to heirs during their lifetimes.

To accomplish this, testamentary gift annuity agreements (typically one for each beneficiary) would be made between you and a charitable foundation during lifetime. Your estate documents would specify that upon your death the gift annuities would be funded, and stipulate that they be funded through tax deferred retirement assets (or any IRD assets) to the extent of these assets are available. The annuities would provide a source of income to personal beneficiaries for their lifetimes. The actual income paid would be based upon the size of the gift annuity, the age of the beneficiary, and prevailing interest rates. It is important to note that most foundations that administer gift annuities set minimum gift thresholds of at least $10,000 per annuity.

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Charitable Remainder Trust

A Charitable Remainder Trust is a charitable trust that makes payments to specific beneficiaries for their lifetimes or for a term of years, and afterward the remainder interest in the trust benefits specified charities. There are many types of charitable remainder trusts. For simplicity here we will address the testamentary charitable remainder unitrust (TCRUT).

When incorporated into estate plans, the testamentary trust is created within the estate documents, which typically stipulate that at death the trust be funded, with tax encumbered (IRD) assets, to the extent of these assets are available. The trust will pay out annually, to heirs, a prescribed percentage of the trust value. This percent and duration are determined in the estate documents. At the conclusion of the time set to pay heirs, a designated charity would receive the remainder of the interest in the trust. The trust assets grow tax-free. The TCRUT gives the estate an estate tax deduction on a portion of the assets that go into the trust

With a TCRUT, a payout percentage (5% or more) is specified within the estate documents, as is a period of time for the unitrust to make distributions to personal beneficiaries. Actual payments would be determined by this payout percentage and the value of the assets in the trust. Many people choose to pay the unitrust amount to family members for a period of time that would pay out an amount equal to the initial value of the property.

For example, a trust, which pays 7% for fifteen years, will pay to family members income, which equals approximately the initial fair market value of the property. By this method the [type] is able to double the total benefits from the property once to the family through income payments and once to the charities through distribution of the principal after all income payments are completed.

One advantage of the Charitable Remainder Unitrust is that the amount remaining in the trust grows tax-free. For example, if a person selected a 6% payout trust and the trust investments earned 8%, there would be 2% growth tax-free each year. This tax-free growth could substantially increase the value of the trust over time and since the selected 6% payout is based on this value, distributions to personal beneficiaries would increase proportionally.

The ability of the unitrust to increase both in principal and in income payments over a period of years is frequently referred to as an inflation hedge. However, please understand that this benefit does not come without risk. In the above example, if the growth in the trust falls short of the payout (6% in this instance), then income payments to beneficiaries would actually decline with time.

In accessing the utilization of Charitable Remainder Trusts, PhilanthroCorp generally recommend that this option only be considered if at least $100,000 is available to fund this trust, as otherwise administrative expenses will likely negate much of the benefit.

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Charitable Lead Trust

A Charitable Lead Trust (CLT) is often described as the reverse of a Charitable Remainder Trust because the interests going to the charitable and non-charitable beneficiaries in a CLT are the opposite of a CRT.

With a CLT, you transfer assets to the trust, which pays one or more charities an income stream for a period of time. When the period of time you specify ends, the remaining trust property returns to you or goes to other non-charitable beneficiaries, such a your spouse, children, grandchildren, or anyone else you name in the trust.

Testamentary Charitable Lead Annuity Trust

The lead trust is an excellent means for transferring principal to family members at a future time and saving substantial estate taxes while effecting this transfer. The [type] directs that a portion of the estate be set aside into the lead trust. For the selected period of time the trust pays income to charity. After the term of years, the principal is distributed to family members. Since a substantial income payment will be made to charity, there can be a very large estate tax charitable deduction.

Estate Tax Deduction

The [type] selects the initial trust payout percentage, the term of years and the percent of the estate to be allocated to the trust. The initial lead trust payout percentage is multiplied times the initial net fair market value and this amount is then distributed that year to charity. If there is any appreciation or accumulation in excess of the income amount, this can be retained in the trust and will eventually be passed through to family members. The Treasury tables are used to value the charitable deduction based upon the annuity percentage and the term of years selected. For many lead trusts, one-half to three-fourths of the initial value of the trust may be taken as an estate tax charitable deduction. In fact, these can be structured in a manner that the full value of the initial trust can be taken as a charitable deduction.

Transfer of Appreciating Property

The major benefit of the lead trust is the ability to transfer appreciating property to family members at very low tax cost. The property is initially valued as of the date of creation of the trust and, as noted above, the trust may enjoy a very substantial charitable deduction. If the property appreciates substantially during the term of years, the value distributed to family members may be very much greater than the initial value of the trust. Many families have used lead trusts to transfer very large and valuable properties to family members at little or no tax cost. This trust is often used in conjunction with other trusts that provide income (such as a charitable remainder trust) while the family is waiting for the lead trust principal. It can be a truly dramatic way to pass great wealth to family members with little or no estate tax cost.

PhilanthroCorp's services are provided from LeSEA at no cost to you. It is their philosophy to assume a servant's role in this process, seeking to be a blessing to you. learn how to get started (click here)

To request a free phone conference with one of PhilanthroCorp's estate planning specialists, call 800-876-7958 ext 2127 or email (click here)

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