Planning with Charitable Lead Trusts and Charitable Remainder … · 2013-03-05 · 2 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts,Q FUHDWLQJ D &/7 WUHPHQGRXV
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 1
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
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Although some of the basics of CLTs and CRTs are similar, they
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Charitable Lead Trusts
Technically, a CLT is a split-interest trust with a charitable
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FLDU\DOVRNQRZQDVWKH´OHDGµEHQHÀFLDU\JHWVSHULRGLFXVXDOO\annual) payments for the term of the trust, and the noncharitable
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One of the major reasons to create a CLT is to reduce or eliminate
JLIWDQGHVWDWHWD[HV&/7VFUHDWHRSSRUWXQLWLHVWKURXJKERWKWKHtax 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
UHGXFHWKHLUHVWDWHWD[ELOO3XWDQRWKHUZD\DQ\RQHSODQQLQJWRleave money to charity and heirs can, assuming reasonable invest-
ment returns, give some calculable amount to their heirs free of
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bining the CLT with a private foundation sweetens the deal even
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2 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts
,QFUHDWLQJD&/7WUHPHQGRXVÁH[LELOLW\LVSRVVLEOH7KH&/7FDQbe heavily weighted toward charity, with the gift/estate tax ben-
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'XULQJPXFKRIWKHGHFDGHRIWKHVLWVHHPHGSRVVLEOHWKDWWKHHVWDWHWD[ZRXOGJRDZD\DVLWGLGIRUDVLQJOH\HDULQ,Qfact, many countries, including our nearest neighbors Canada and
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 3
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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
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Determining which type of trust is appropriate will depend heav-
LO\RQWKHSDUWLFXODUFLUFXPVWDQFHVRIWKHWUXVWRU$JUDQWRU&/7gives the grantor an up-front income tax deduction equal to the
present value (calculated according to rates set by the IRS) of the
JLIWVODWHUJLYHQWRFKDULW\%HFDXVHZHDUHQRWH[DPLQLQJWKH&/7as a planning vehicle for income tax reduction, for simplicity we
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/HW·VUHYLHZZKDWKDVKDSSHQHGWith the CLT, the father pays
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Without WKH&/7WKHIDWKHUNHHSVWKHPLOOLRQOHWVLWJURZIRU\HDUVWRPLOOLRQDQGWKHQJLYHVLWWRKLVFKLOGUHQ7KHHVWDWH
_Planning with Charitable Lead Trusts and Charitable Remainder Trusts
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people would rather have money now instead of later and demand
WREHSDLGLQWHUHVWLIWKH\PXVWZDLW/XFNLO\IRUGRQRUVWKHWD[code recognizes the time value of money and tells us exactly how
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can expect to earn returns much higher than the returns on gov-
ernment bonds, the government is passing this extra growth along
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If a CLT is a home run for planning, combining a CLT with a pri-
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 5
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ciary, the donor must not end up in control of the funds given by
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Another advantage of this combined strategy is that the private
foundation needs to distribute only 5 percent of its assets each
\HDU7KLVPHDQVWKDWWKHIRXQGDWLRQ·VDVVHWVFDQJURZWRR,QRXUoriginal CLT example, if both the CLT assets and the foundation
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In short, a CLT, when combined with a private foundation, is a
YHU\SRZHUIXOFKDULWDEOHDQGWD[SODQQLQJWRRO:KLOHWKHFRQFHSWVare straightforward enough for nontechnically minded donors, the
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3HUKDSVPRVWVWULNLQJDERXWWKLVVWUDWHJ\LVWKDWJLYHQDQ$)5Dtrust term, and an anticipated rate of return, the effective tax rate is
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CLTs Can Cut the Estate Tax Rate
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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) $3.0 million 6.6%
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The table above illustrates that for a person willing to commit in
_Planning with Charitable Lead Trusts and Charitable Remainder Trusts
advance to dividing his estate between charity and children, the
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out planning, while charity got money that would otherwise have
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$Q\WLPHDGRQRULQWHQGVWROHDYHDVLJQLÀFDQWDPRXQWWRFKDU-ity upon his death and the remainder (less taxes) to heirs, a CLT
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Charitable Remainder Trusts
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bly-minded individuals who own appreciated property are often
advised to create a CRT because a CRT allows the tax-free sale of
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The amount of the tax deduction is determined by four variables:
the value of the assets placed in trust; the present value of the
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Because a CRT can be used to defer capital gains tax, it is particu-
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_Planning with Charitable Lead Trusts and Charitable Remainder Trusts
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ciary duty not only to the donor, but also to the charitable remain-
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 11
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12 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts
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Flexibility and Irrevocability
In the past, one of the biggest barriers to setting up a CRT or CLT
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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 13
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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.
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Hoboken, nJ²-RKQ:LOH\6RQVKDVUHOHDVHGManaging Foundations and Charitable TrustsE\5RJHU'6LON3K'DQG-DPHV:/LQWRWW(VT7KLVYROXPHLVWKHVHFRQGHGLWLRQRIWKHLUFULWLFDOO\DFFODLPHGERRNCreating a Private Foundation.
What They’re Saying About Managing Foundations and Charitable Trusts
Available on Amazon.com or
Wiley.com.
New chapters include:
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“A copy…should be in the library of every
philanthropist and foundation.”
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“This remarkably readable, yet complete and authoritative book helps guide both novices and experts through these poten-tially confusing areas. Anyone who has a foundation or a CRT RULVFRQVLGHULQJRQHZLOOÀQGit helpful.”
Jerry J. McCoy, Editor
Family Foundation Advisor
“After nearly four decades of counseling wealthy families…, KDYH ÀQDOO\ IRXQG WKH SHUIHFWtool for my clients in the imple-mentation and maintenance of their charitable giving…a must for inclusion in the library of any foundation manager.”
Robert D. Borteck, Partner
Borteck, Sanders and Torzewski, LLP
“Every person who wants to become an intentional philan-thropist should read it. It is not only very readable, but it is comprehensive and full of gen-eralized advice…I want to have copies available to give to seri-ously motivated clients.”
Chris Johnson, Of Counsel
Buchanan & Stouffer, P. C.
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