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 can yield some dramatic tax advantages. They are
described briefly below. Because of your interest in TEAM, 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 contractual agreements between a donor and
a charity, in which the charity receives funds and in return promises
to make lifetime payments to the donor or to designated beneficiaries.
The charity invests the funds, and at the death of the last beneficiary,
the residuum will pass directly to the 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 your lifetime. Your estate documents would specify that the gift
annuities would be funded upon your death and stipulate that they be
funded through tax-deferred retirement assets (or any IRD assets) to
the extent 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, after
which the remainder of the interest in the trust benefits specified
charities. There are many types of charitable remainder trusts. For
simplicity, here we will only 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 the trust be funded
at death, with tax-encumbered (IRD) assets to the extent these assets
are available. The trust will pay out a prescribed percentage of the
trust value annually to the heirs. This percentage and the duration
of the payments are determined in the estate documents. At the conclusion
of the time set to pay the heirs, a designated charity receives 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 are determined by this payout
percentage and the value of the assets in the trust. Many people choose
to pay family members for a period of time that results in a total amount
equal to the initial value of the property.
For example,
a trust that pays 7% for fifteen years will supply family members
with income equaling approximately the initial fair market value of
the property. By this method, the donor 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), the income payments to beneficiaries
would actually decline with time.
In assessing
the utilization of charitable remainder trusts, PhilanthroCorp
generally recommends that this option only be considered if at least
$100,000 is available to fund the trust; administrative expenses will
likely negate much of the benefit otherwise.
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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 those in a CRT.
With a CLT,
you transfer assets to the trust, which pays one or more charities an
income stream for a specified period of time. When that period of time
ends, the remaining trust property returns to you or goes to other non-charitable
beneficiaries, such as 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 donor directs that a portion of the estate be set
aside into the lead trust. For the selected term of years, the trust
pays income to charity; then, the principal is distributed to family
members. Since a substantial income payment will be made to charity,
a very large estate tax charitable deduction can be made.
Estate Tax
Deduction
The donor
selects the initial trust payout percentage, the term of years,
and the percentage of the estate to allocate to the trust. The initial
lead trust payout percentage is multiplied by the initial net fair market
value, and this amount is distributed to charity for that year. 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 such 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 a 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.
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PhilanthroCorp's
services are provided at no cost to you, as a donor of TEAM.
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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