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 FKDULWDEOH DQG QRQFKDULWDEOH EHQHÀFLDULHV 7KLV VSOLW SHUVRQDOLW\ FUHDWHV VRPH LQWHUHVWLQJ SODQQLQJ RSSRUWXQLWLHV Although some of the basics of CLTs and CRTs are similar, they WHQG WR EH XVHG TXLWH GLIIHUHQWO\ /HW·V ORRN DW HDFK LQGLYLGXDOO\ Charitable Lead Trusts Technically, a CLT is a split-interest trust with a charitable EHQHÀFLDU\ DQG D QRQFKDULWDEOH EHQHÀFLDU\ 7KH FKDULWDEOH EHQHÀ- FLDU\ DOVR NQRZQ DV WKH ´OHDGµ EHQHÀFLDU\ JHWV SHULRGLF XVXDOO\ annual) payments for the term of the trust, and the noncharitable EHQHÀFLDU\ JHWV ZKDWHYHU LV OHIW³WKH ´UHPDLQGHUµ³DW WKH HQG RI WKH WHUP 7\SLFDOO\ D GRQRU ZLOO FUHDWH D &/7 ZLWK KLV IDYRULWH FKDULW\ DV WKH OHDG EHQHÀFLDU\ DQG KLV FKLOGUHQ DV WKH UHPDLQGHU EHQHÀFLDULHV One of the major reasons to create a CLT is to reduce or eliminate JLIW DQG HVWDWH WD[HV &/7V FUHDWH RSSRUWXQLWLHV WKURXJK ERWK WKH 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 UHGXFH WKHLU HVWDWH WD[ ELOO 3XW DQRWKHU ZD\ DQ\RQH SODQQLQJ WR leave money to charity and heirs can, assuming reasonable invest- ment returns, give some calculable amount to their heirs free of HVWDWH DQG JLIW WD[ VLPSO\ E\ VHWWLQJ XS DQ DSSURSULDWH &/7 &RP- bining the CLT with a private foundation sweetens the deal even IXUWKHU E\ NHHSLQJ WKH FKDULWDEOH PRQH\ LQ WKH IDPLO\·V FRQWURO
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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
'XULQJPXFKRIWKHGHFDGHRIWKHVLWVHHPHGSRVVLEOHWKDWWKHHVWDWHWD[ZRXOGJRDZD\DVLWGLGIRUDVLQJOH\HDULQ,Qfact, many countries, including our nearest neighbors Canada and
&RQFOXVLRQWKH&/7DOORZVWKHNLGVWRJHWDERXWWKHVDPHDPRXQWthey would have received anyway, but allows the donor also to
JLYHPLOOLRQWRFKDULW\
:K\GRHVD&/7PDNHWD[VHQVH"7KHWD[VDYLQJSRZHURID&/7FRPHVIURPWKHPDWKHPDWLFDOSKHQRPHQRQNQRZQDVWKH´WLPHYDOXHµRIPRQH\7KHLGHDLVWKDWHYHU\WKLQJHOVHEHLQJHTXDODdollar today is worth more than a dollar in the future (because
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
/HW·VORRNDWLWDQRWKHUZD\7KHJRYHUQPHQWDVVXPHVWKDWSHRSOHZLOOLQYHVWWKHLUPRQH\DQGHDUQVRPHWKLQJRQLW,QVHWWLQJXSWKHrules for CLTs, the government tells us what growth rate to use in
ŶŶƵĂůWĂLJŵĞŶƚ EĞƚƚŽ,ĞŝƌƐĂƚ īĞĐƟǀĞto 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) $3.0 million 6.6%
^ŽƵƌĐĞ^ƚĞƌůŝŶŐ&ŽƵŶĚĂƟŽŶDĂŶĂŐĞŵĞŶƚƐƚĂƚĞWůĂŶŶŝŶŐ
The table above illustrates that for a person willing to commit in
_Planning with Charitable Lead Trusts and Charitable Remainder Trusts
advance to dividing his estate between charity and children, the
HIIHFWLYHWD[UDWHFDQEHEURXJKWYHU\ORZ7KLVUHVXOWSURYHVWUXHWKHDGDJHWKDWWKHHVWDWHWD[LVDYROXQWDU\WD[$QGLWLVQRWQHFHV-sary, as some claim, to leave all your wHDOWKWRFKDULW\,QRXU&/7example, which was not aggressive, the total transfer tax was less
$Q\WLPHDGRQRULQWHQGVWROHDYHDVLJQLÀFDQWDPRXQWWRFKDU-ity upon his death and the remainder (less taxes) to heirs, a CLT
PXVWEHFRQVLGHUHG7KHORJLFLVVWUDLJKWIRUZDUG$GRQRUZKRZDLWVXQWLOGHDWKWRPDNHWKHFKDULWDEOHFRQWULEXWLRQJHWVQRLQFRPHWD[EHQHÀWH[FHSWZKDWHYHUUHODWLYHO\VPDOODPRXQWPD\be usable by the estate in the year of death) and (2) an unlever-
DJHGHVWDWHWD[EHQHÀWEHFDXVHWKHRQO\HVWDWHWD[EHQHÀWLVWKHcharitable contribution deduction against the value of the taxable
bly-minded individuals who own appreciated property are often
advised to create a CRT because a CRT allows the tax-free sale of
DSSUHFLDWHGSURSHUW\LQVLGHWKHWUXVW+RZHYHULQPDQ\FDVHVthey might be better off simply selling the property and using the
SURFHHGVWRIXQGDSULYDWHIRXQGDWLRQRURWKHUFKDULWDEOHHQWLW\To determine which strategy is better, it helps to understand how
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$&57OLNHD&/7LVDWUXVWZLWKWZREHQHÀFLDULHV:LWKD&57KRZHYHUWKHGRQRUDQGRUWKHGRQRU·VVSRXVHJHWWKHDQQXDOSD\PHQWVIRUOLIHRUIRUDVSHFLÀHGWHUPDQGDFKDULW\JHWVWKHUHPDLQGHU7KHUHDUHWZRSULPDU\WD[EHQHÀWV7KHGRQRUJHWVan immediate income tax deduction for the value of the amount
GRQDWHGWRFKDULW\DQGWKH&57LWVHOILVQRWVXEMHFWWRLQFRPHWD[(A CRT is not a very useful estate planning tool, although it is
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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
SD\PHQWVWKHLQFRPHEHQHÀFLDU\ZLOOUHFHLYHWKHLQWHUHVWUDWHVHWmonthly by the IRS); and the projected length of the trust, which
SRVHDGRQRURZQVVWRFNZRUWKPLOOLRQIRUZKLFKKHRULJLQDOO\SDLG,IKHVHOOVWKHVWRFNKHZLOOSD\FDSLWDOJDLQVWD[HVRIDWOHDVWRQWKHJDLQ7KLVZRXOGOHDYHKLPZLWKWRLQYHVW,IKHSXWVWKHVWRFNLQWRD&57LQVWHDGDQGWKH&57VHOOVWKHVWRFNKHSRVWSRQHVSD\LQJWKHFDSLWDOJDLQVWD[DQGWKH&57FDQUHLQYHVWWKHHQWLUHPLOOLRQ,QDGGLWLRQKHJHWVDQimmediate income tax deduction based on the remainder amount
WLRQJHQHUDWHDWD[GHGXFWLRQKHDYRLGVSD\LQJDQ\WD[RQWKDWJDLQ%RWKDSSURDFKHVSURGXFHWKHVDPHXSIURQWincome tax deduction, and both will irrevocably set aside assets
_Planning with Charitable Lead Trusts and Charitable Remainder Trusts
,QWKLVH[DPSOHHLWKHUD&587RUDSULYDWHIRXQGDWLRQZRXOGSURGXFHDQLQFRPHWD[GHGXFWLRQRI+RZHYHUWKH&587requires the irrevocable commitment of ten times as much money
DVWKHSULYDWHIRXQGDWLRQ:LWKWKH&587WKHGRQRU·VOLTXLGLW\LVOLPLWHGWRWKHDQQXDOFDVKÁRZVZKLFKFRQVWLWXWHWKH´UHWDLQHGXQLWUXVWµLQWHUHVW%\SODFLQJDVVHWVLQWRD&587WKHGRQRUEDVL-FDOO\JLYHVXSOLTXLGLW\)XUWKHUPRUHWKHFKDULW\GRHVQRWKDYHDFFHVVWRWKH&587DVVHWVHLWKHU7KH&587DVVHWVDUHWLHGXSIRUWKHWHUPRIWKHWUXVW2QO\DWWKHFRQFOXVLRQGRHVWKHUHPDLQGHUDPRXQWEHFRPHDYDLODEOHIRUFKDULW\6HOOLQJVWRFNDQGWKHQXVLQJthe proceeds to fund a foundation, on the other hand, leaves the
,WGHSHQGVRQDQXPEHUIDFWRUV%XWLQVRPHFDVHVWKHDQVZHULVQHYHU7KLVLVEHFDXVHWKHGHIHUUDOYDOXHGHSHQGVKHDYLO\XSRQWKHUDWLRRIWKHSURSHUW\·VFRVWEDVLVWRLWVFXUUHQWYDOXH7KHORZHUthis ratio, the more valuable deferral is; the higher the ratio, the
,IWKHEDVLVUDWLRLVEHORZSHUFHQWDQGWKHGRQRUFDQZDLWORQJenough, he can eventually realize more value from the CRT alter-
QDWLYHWKDQIURPWKHSULYDWHIRXQGDWLRQDOWHUQDWLYH%XWWKLVZDLW-LQJSHULRGFDQEHORQJ)RUH[DPSOHDVVXPHSHUFHQWUHWXUQVRYHUWKHORQJUXQRQLQYHVWHGDVVHWVDSHUFHQWHIIHFWLYHLQFRPHWD[UDWHIRUWKHGRQRUDQGDOLIHWLPH&587WKDWLVRQHZKRVHWHUPLVGHÀQHGDVWKHOLIHRIWKHGRQRU7KLVWDEOHVKRZVKRZORQJZRXOGEHQHHGHGWRZDLWIRUWKHDFFXPXODWHGFDVKÁRZVGLVWULEXWHGWRthe donor and reinvested) to exceed the amount the donor would
(YHQZKHQWKHGHIHUUDOEHQHÀWVH[FHHGWKHFRVWVWKHUHLVQRVLPSOHULJKWDQVZHUDVWRZKHWKHUWRXVHD&5877KHDQVZHUGHSHQGVRQWKHGRQRU·VZLOOLQJQHVVWRZDLWIRUWKHGHIHUUDOEHQHÀWVWRDGGXSexpectations about future tax rates, and his or her level of concern
Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 13
+RZHYHULQWKHSDVWGHFDGHDPDUNHWKDVGHYHORSHGIRUWKHLQFRPHVWUHDPVRI&57V7KHSRVVLELOLW\RIVHOOLQJD&57LQFRPHstream means that even though the trust is irrevocable, and the gift
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.
Sterling Foundation ManageMent, llC'XOOHV&RUQHU%OYG6L[WK)ORRU+HUQGRQ9$
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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
“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.”