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Charitable Planning - Part 2

Posted by attorney Thomas Begley

For high net-worth individuals and couples, there are a variety of transfer techniques in order to minimize exposure to death taxes. These include, but are not limited to Disclaimer Trusts, Credit Shelter Trusts, Applicable Exemption Trusts (a/k/a Credit Shelter Trusts), and Q-TIP Trusts. These Trusts, effective for use with married couples, can be utilized in Wills and Revocable Living Trusts. To further minimize potential payment of estate and inheritance taxes, a variety of other techniques may be employed. This guide is the second part of a series on charitable planning.


One of the most popular techniques, for mid-level to high ne-worth clients, is the utilization of Charitable Trusts. There are two general forms for Charitable Trust:

A. Charitable Lead Trusts; and B. Charitable Remainder Trusts. Since the Tax Reform Act of 1969, only certain kinds of bequests in Trusts qualify for the estate tax charitable deduction where there is one or more non-charitable beneficiaries in addition to the charitable beneficiary. Both Charitable Lead Trusts and Charitable Remainder Trusts are vehicles by which there are benefits both to donor and/or his or her family as well as charitable organizations.

A Charitable Lead Trust is a Trust, which is established by a donor, with the contribution in trust of investment property in which the income from the Trust is to be paid to one or more qualified charitable organizations at least annually for the term of the Trust. Typically, assets, which are used to fund this Trust, are those which are expected to appreciate over the life of the Trust. Upon the expiration of the term of the Trust, the remainder interest passes to a non-charitable remainderman, specifically the donor’s intended beneficiary.

The use of Charitable Lead Trusts, in general, meet two goals. First, it allows the donor to make significant lifetime donations to charitable organizations. Second, it also ensures that the family members, who will be the ultimate heirs of said Trust, will enjoy the ultimate prosperity of the asset. In establishing these Trusts, the donor, as well as his or her family, forego income for the tradeoff of realizing long-term capital appreciation and at a low gift or estate tax cost.

In order for a Charitable Lead Trust to qualify for the charitable deduction, the income interest, to be received by the qualified charitable organization, must be either in the form of a guaranteed annuity or a unitrust interest. The term of the Trust may be either for finite period of years or can be based upon the life or lives of individuals who are alive at the creation of the Trust. A Charitable Lead Annuity Trust is one in which a charitable organization receives a fixed amount in the form of a guaranteed annuity for a certain number of years, with the remainder passing to a private individual or individuals. A Charitable Lead Unitrust is one in which a fixed percentage of trust corpus, determined annually, is paid to a charitable beneficiary or beneficiaries, with the remainder passing tto one or more non-charitable beneficiaries at its termination.

To properly understand Charitable Lead Trusts, one must recognize that they are split interests where the charitable organization holds the first or lead interest and the non-charitable entity or individual receives the remainder interest. A guaranteed annuity interest is deductible regardless of whether or not it is in Trust. It must consist of the right of a charitable organization to receive a guaranteed annuity. If a Charitable Lead Trust is used, the Trust must be irrevocable. If the interest is not in a Trust, it must be paid by an insurance company or other company that issues annuity contracts. See Sections 170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).

The Unitrust interest is deductible, whether utilized in a Trust or not, if it consists of the right of the charitable organization to receive payment of a fixed percentage of the fair market value of the property if funding the interest so long as the payment is made at least annually. Like the annuity interest, it must be paid by an insurance company or other company in the business of issuing such interests if the Unitrust interest is not in Trust. If it is in Trust, the Trust must be irrevocable. See Sections 170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).

Both forms of Lead Trusts can be established as Grantor Lead Trusts, Non-Grantor Lead Trusts and Testamentary Lead Trusts. A Grantor Lead Trust is one which is established by a donor and provides the donor a current income tax charitable deduction for the present value of the charitable distribution over the term of the Trust, but the Trust income is imputed as taxable income to the donor each year. In a Non-Grantor Lead Trust, a gift or estate tax deduction is allowed for the value of the charitable interest, established as the present value of the payments to charity over the term of the Trust. Unlike the Grantor Lead Trust, there is no income tax deduction for the Non-Grantor Lead Trust for the donor. Testamentary Lead Trusts are commonly used when there is no deferral through the use of the marital deduction and the estate can thereby obtain an estate tax charitable deduction for the present value of the charitable lead interest.

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