The disposition of your assets in your estate plan may seem unrelated to life insurance…
An irrevocable trust that benefits a charity and also provides income to the heirs is a charitable trust. If you are philanthropically minded with nonessential assets like stocks or real estate, a charitable trust can offer many financial advantages for all those involved. Once in place, a charitable trust is irrevocable even if you experience a personal or business financial loss. There are two primary charitable trust types:
Charitable Lead Trust (CLT) – This trust is designed to distribute a portion of its proceeds to charity for which you receive a tax deduction equal to the payments. The remainder of the principal is distributed among your beneficiaries.
Charitable Remainder Trust (CRT) – This trust grants income to a designated individual by distributing non-income-producing assets first placed in the trust. A charitable donations tax deduction applies to the remaining assets earmarked for the charity. The chosen charity receives the remaining assets at the end of the trust’s term or upon your death.
Each trust type comes with many options to consider and strategies for maximizing its benefits. Both trust types do not require you to choose your charity beneficiary. Instead, you create a donor-advised fund that directs payments from either trust type to your chosen charities. This tactic allows flexibility to change your mind about an existing charity or add a new one.
For income-producing purposes to heirs, a charitable remainder trust provides options from the sale of your non-income-producing assets. For example, purchasing a life insurance policy can have premiums paid by the charitable remainder trust while using residual funds to support philanthropic intentions.
Charitable Remainder Trusts are also known as a split-interest trusts, making payments from income first to the beneficiary or beneficiaries in a set amount with the remaining income supporting the organization, which is the opposite of a Charitable Lead Trust. Often the grantor is the primary beneficiary, with contingent beneficiaries named after the grantor’s death.
The two ways to receive trust payments in a Charitable Remainder Trust are either a fixed annuity or a percent of trust assets known as a unitrust.
In a Charitable Remainder Annuity Trust, it is not permissible to change the annuity amount once the trust is created, so it is best to over-fund rather than not have enough. An annuity trust provides a fixed dollar amount each year even if the trust’s income is less than anticipated.
A Charitable Remainder Unitrust allows receipt of a fixed percentage of the trust’s assets each year. The trust’s value receives an annual appraisal which determines the dollar amount of the set percentage for distribution. This funding method ties income to the trust’s success, providing more in good years and less in years when assets are underperforming. If trust payments are not a significant source of income for beneficiaries, this can be a good option. The IRS requires a minimum five percent distribution of the trust valuation annually.
Work with an estate attorney to design a charitable trust. They can help you determine which charitable trust type is best for you and what assets to place in the trust. An estate planning attorney will help you identify beneficiaries and payment strategies, as well as the value of your tax deduction. Once you draw up the trust document, the assets will be moved to fund the charitable trust unless you create the trust as part of your will.
The charity you seek to benefit from may have preferences about how and when to donate. Speak with the organization before creating an irrevocable charitable trust. This trust type can lessen your income, estate, and capital gains taxes by making 501(c)(3) donations to a charity and providing a steady income to heirs. Creating a charitable trust is a practical, multipronged approach to leaving your legacy, permitting the allocation of money for both a charity and your beneficiaries while realizing specific tax advantages. We hope you found this article helpful. If you have questions or would like to discuss a personal legal matter, don’t hesitate to reach out. Please contact our office at 732-972-1600.