If you're reading this guide, you have either decided to leave a portion of your estate to a charity, or are considering doing so. Fortunately, it is very easy to make such a gift, and there are a number of trusts through which an estate planning attorney can structure your gift to help you maintain your financial needs while simultaneously reducing your estate taxes, income taxes, and capital gains taxes. The first question to consider is whether to pay the charity now or later.
Now or Later?
There are two primary forms of charitable trusts: Charitable Remainder Trusts ("CRTs") and Charitable Lead Trusts ("CLTs"). The difference between the two lies in whether the charity receives income from the trust during or after your lifetime. CRTs pay income to yourself (or another beneficiary) during your lifetime, and subsequently, the remaining principal in the trust is transferred to the charity. Alternately, CLTs pay income to the charity during your lifetime, and subsequently, the remaining principal in the trust is transferred to your heirs.
Now or Later? (Part 2)
They are both irrevocable trusts, which (as the name implies) cannot be changed or canceled once they are set up without the consent of the beneficiary. However, in return for their permanence, they offer tax advantages. Once you, as a grantor, transfer assets to a CRT or CLT, they are no longer considered part of your taxable estate, which can significantly reduce your estate taxes. Also, when you sell an asset (such as stock, real estate, etc.) into a CRT or CLT, it is not subject to capital gains tax. This in itself can also prevent a potentially significant income tax burden. Additionally, both CRTs and CLTs can provide you with potentially significant annual income tax deductions.
Fixed Payment or Percentage?
The next question to consider is whether you would like to distribute income from the trust as a fixed dollar amount or fixed percentage of the principal in the trust. If you would like the trust to pay out a fixed income to beneficiaries in a manner similar to an annuity, Charitable Remainder Annuity Trusts ("CRATs") or Charitable Lead Annuity Trusts ("CLATs") are two possible options. Alternately, if you would prefer that the trust pays out a percentage of the principal in the trust to beneficiaries, Charitable Remainder Unitrusts ("CRUTs") and Charitable Lead Unitrusts ("CLUTs") are two possible options. Based on your financial needs and charitable goals, an estate planning attorney can tailor a trust to provide maximum benefit to you, your beneficiaries, and your desired charities during and after your lifetime.
Estate planning tools shouldn't be considered in a vacuum, and charitable trusts are no different. While these can be effective tools to plan and administer your estate, they can provide even more significant benefits when paired with other estate planning devices. For instance, the generation-skipping transfer tax exception can be applied towards a portion of the principal of a CLT, which can significantly reduce estate taxes. Or, a portion of the beneficiary's income from a CRT can pay premiums of an Irrevocable Life Insurance Trust ("ILIT") to provide estate tax-exempt insurance proceeds to the beneficiary upon the grantor's death, when the income ceases and assets from the CRT are transferred to a charity. Is a charitable trust right for you? Call an estate planning attorney to review your goals, explain the law, and provide a solution that offers an effective way to leave a lasting legacy with your favorite charity while reaping financial benefits for you during your lifetime.