Planning with Charitable Lead Trusts and Charitable Remainder Trusts
Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs) are called “split interest” trusts because they have both
Although some of the basics of CLTs and CRTs are similar, they
Charitable Lead Trusts
Technically, a CLT is a split-interest trust with a charitable - annual) payments for the term of the trust, and the noncharitable
One of the major reasons to create a CLT is to reduce or eliminate tax laws and straightforward mathematics, leading to interesting and surprising results: Anyone planning to leave money both to charity and to heirs at death will pay estate tax only by default (through bad planning) or through a conscious decision not to leave money to charity and heirs can, assuming reasonable invest- ment returns, give some calculable amount to their heirs free of - bining the CLT with a private foundation sweetens the deal even
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 1 be heavily weighted toward charity, with the gift/estate tax ben-
fact, many countries, including our nearest neighbors Canada and
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2 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts will also get an immediate income tax deduction on setting up the
A CLT can be set up as a grantor trust, that is, a special type of trust that for most purposes does not pay income taxes and instead
Determining which type of trust is appropriate will depend heav- gives the grantor an up-front income tax deduction equal to the present value (calculated according to rates set by the IRS) of the as a planning vehicle for income tax reduction, for simplicity we
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With the CLT, the father pays
Without
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 3
they would have received anyway, but allows the donor also to
dollar today is worth more than a dollar in the future (because people would rather have money now instead of later and demand code recognizes the time value of money and tells us exactly how - -
rules for CLTs, the government tells us what growth rate to use in - because if you assume that most long-term investors in equities can expect to earn returns much higher than the returns on gov- ernment bonds, the government is passing this extra growth along
If a CLT is a home run for planning, combining a CLT with a pri- -
Planning with Charitable Lead Trusts and Charitable Remainder Trusts - ciary, the donor must not end up in control of the funds given by
Another advantage of this combined strategy is that the private foundation needs to distribute only 5 percent of its assets each original CLT example, if both the CLT assets and the foundation
In short, a CLT, when combined with a private foundation, is a are straightforward enough for nontechnically minded donors, the
trust term, and an anticipated rate of return, the effective tax rate is
CLTs Can Cut the Estate Tax Rate
to Charity End of Trust Term Tax Rate 8% ($80,000) $1.5 million 1.4% 7% ($70,000) $2.0 million 4.0% 6% ($60,000) $2.5 million 5.6% 5% ($50,000) $3.0 million 6.6%
The table above illustrates that for a person willing to commit in
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 5 advance to dividing his estate between charity and children, the - sary, as some claim, to leave all your w example, which was not aggressive, the total transfer tax was less - out planning, while charity got money that would otherwise have
- ity upon his death and the remainder (less taxes) to heirs, a CLT be usable by the estate in the year of death) and (2) an unlever- charitable contribution deduction against the value of the taxable
our hypothetical father has determined to leave 25 percent of
Planning with Charitable Lead Trusts and Charitable Remainder Trusts -
Charitable Remainder Trusts
- bly-minded individuals who own appreciated property are often advised to create a CRT because a CRT allows the tax-free sale of they might be better off simply selling the property and using the To determine which strategy is better, it helps to understand how
an immediate income tax deduction for the value of the amount (A CRT is not a very useful estate planning tool, although it is
The amount of the tax deduction is determined by four variables: the value of the assets placed in trust; the present value of the monthly by the IRS); and the projected length of the trust, which
Because a CRT can be used to defer capital gains tax, it is particu-
Planning with Charitable Lead Trusts and Charitable Remainder Trusts - immediate income tax deduction based on the remainder amount
- -
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts - income tax deduction, and both will irrevocably set aside assets
Issue Contribute $5 Million Contribute $500,000 to a
Planning with Charitable Lead Trusts and Charitable Remainder Trusts requires the irrevocable commitment of ten times as much money - the proceeds to fund a foundation, on the other hand, leaves the
- ciary duty not only to the donor, but also to the charitable remain- -
this ratio, the more valuable deferral is; the higher the ratio, the
Planning with Charitable Lead Trusts and Charitable Remainder Trusts -
enough, he can eventually realize more value from the CRT alter- - the donor and reinvested) to exceed the amount the donor would
35 32 34 36 43
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 11
expectations about future tax rates, and his or her level of concern
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Flexibility and Irrevocability
In the past, one of the biggest barriers to setting up a CRT or CLT
a 5 percent CRT has given up the liquidity of that money perma-
12 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts stream means that even though the trust is irrevocable, and the gift
Sterling Foundation ManageMent, llC
Sterling Foundation Management, LLC does not provide tax or legal advice, and noth- ing in this document is to be construed as such. Any information or analysis provided is believed to be accurate but is not guaranteed or warranted.
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 13 “A copy…should be in the library of every philanthropist and foundation.”
Hoboken, nJ Managing Foundations and Charitable Trusts Creating a Private Foundation.
New chapters include:
Available on Amazon.com or Wiley.com.
What They’re Saying About Managing Foundations and Charitable Trusts
“This remarkably readable, yet “After nearly four decades of “Every person who wants to complete and authoritative book counseling wealthy families… become an intentional philan- helps guide both novices and thropist should read it. It is experts through these poten- tool for my clients in the imple- not only very readable, but it is tially confusing areas. Anyone mentation and maintenance of comprehensive and full of gen- who has a foundation or a CRT their charitable giving…a must eralized advice…I want to have for inclusion in the library of copies available to give to seri- it helpful.” any foundation manager.” ously motivated clients.” Jerry J. McCoy, Editor Robert D. Borteck, Partner Chris Johnson, Of Counsel Family Foundation Advisor Borteck, Sanders and Torzewski, LLP Buchanan & Stouffer, P. C.