In the last issue of Affluent Magazine, we discussed the benefits of using Charitable Remainder Trusts (CRT's) in your estate planning. In summary, you would gift certain assets to the trust, you would receive the income from it for your lifetime, then the residual trust assets would pass on to the named charity or charities. This type of planning would entitle you to current income tax benefits and would reduce your estate at death for estate tax purposes.
A Charitable Lead Trust (CLT) is the reverse of a Charitable Remainder Trust. With a CLT, the charity receives the income during your lifetime and your heirs could receive the residual assets in the trust upon your death. Just like the CRT, you have the ability to put highly appreciated assets or property into the trust and subsequently sell all or part of the assets with a reduction in capital gains taxes. This trust is designed to pay income to a charity or charities for a predetermined period of time.
The best type of assets to consider for a CLT generally are reliable income-producing assets as the trust must make payments at least annually to the named charity. You should also choose assets that will not have to be liquidated in order to make the payments to the charity. The length of time the payment will continue is built into the trust either as a certain number of years, or, more commonly, the trust will end at the death of the grantor. If a number of years is chosen, the remaining assets will most likely return to you (or to loved ones). If the trust states the assets are returned to you (or your loved ones), you would receive a current income tax deduction at the time it is created. If your lifetime is chosen, the assets will pass on to the named beneficiaries and the estate would benefit from reduced or eliminated estate taxes.
How is the balance of the trust taxed at the end of the trust term? If the trust is set up as an annuity with a period certain, only the remainder interest is subject to gift taxes. The remainder interest is predetermined by the IRS who estimates what the value of the principal will be in the future at the end of the trust using current treasury tables. If the assets grow at a pace greater than the stipulated payments to the charity, and the payments are greater than the expected rate of return, the remainder interest will be less than the original gift even though the trusts remaining principal would be higher than the original gift. In this case, the difference between the remainder interest and the end trust value is estate tax-free. Therefore, the best time to consider starting a CLT is when interest rates are at their lowest, as they are now.
Who should consider a CLT? The ideal situation for this type of estate planning is the person who does not need current income; can afford to set aside certain assets for a period of years; has assets with a low cost basis and future growth potential; wants to make annual gifts to their favorite charity; wants to reduce estate taxes; and ensure their heirs receive an inheritance.
The biggest disadvantage of creating a CLT is that it is irrevocable and cannot be changed or revoked in the future. As in all of my reports, you are advised to work with professionals that are experts in this area of estate planning as it can be very advantageous to very large estates, but can't be altered if the estate tax laws change or the grantor needs funds, or simply changes their mind. CRT's and CLT's are powerful estate planning tools. However, there are many other types of trusts that are equally powerful and equally complex. With the right planning, you can take care of your favorite charities and take care of your loved ones.
Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Management Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit www.daviswealth.com, or email: firstname.lastname@example.org.
Davis Wealth Management Group, an independent firm with securities offered through Summit Brokerage Services, Inc. Member FINRA & SIPC, and advisory services offered through Summit Financial Group, Inc., a registered investment advisor.