Charitable Gifting Strategies - Split Interest TrustsCategory: Finance
Article added by: Cathy Pareto
Our first installment on charitable gifting strategies covered the easiest, most basic method of gifting – outright lifetime gifts. This article will give a basic overview of charitable remainder trusts.
The Charitable Remainder Trust (CRT) is one of the most efficient estate planning tools
available to anyone holding appreciated assets with low basis like stocks or real estate. Because of the charitable nature of CRT’s, funding this trust with appreciated assets allows the donor to sell the assets without incurring a capital gain.
The charitable remainder trust is a tax planning tool that almost allows you to have your cake and eat it too. There are two sets of beneficiaries: income beneficiaries (ie. you and your spouse) and the charities that you choose to name in the trust. Income beneficiaries receive a set income during lifetime and the charities receive the residual principal of the trust at your (or spouse’s) death. Depending on how the trust is set up, the payments will continue for a fixed period of time, or until the death of the beneficiary.
The IRS requires that all CRT’s distribute at least 5% of the trust’s fair market value every year. Income beneficiaries not needing the income during a given year can defer the income through a "make up provision”. High distribution percentages to the income beneficiary will depreciate the principal left for the charity. Therefore, the charitable income tax deduction will be smaller too.
There are two types of CRT’s: charitable remainder annuity trusts and charitable remainder
unitrusts. A charitable remainder annuity trust (CRAT) provides a fixed dollar amount with each payment to the beneficiary. This amount corresponds to a percentage of the original investment paid out annually. The amount paid annually to the beneficiary of a charitable remainder unitrust (CRUT) is a fixed percentage of the fair market value of the assets, as determined each year
As a result of the Taxpayer Relief Act of 1997, the trust will not qualify as a CRAT if the annuity for any year is greater than 50 percent of the initial fair market value of the trusts assets or as a CRUT if the percentage of assets required to be distributed at least annually is greater than 50 percent. Any trust that fails this 50-percent rule will be treated as a complex trust and, accordingly, all its income will be taxed to its beneficiaries or to the trust.
Asset transfers into a CRT are considered completed gifts and may reduce the estate tax bill by as much as 55%. Gifts to charities can be unlimited and are not constrained by the $12,000 annual exclusion. CRTs, because they benefit a charity, also qualify you for an income tax deduction that is equal the present value of the remainder interest to the charity.
Who may be the trustee? Anyone. The donor, the income beneficiary, and the charity all can be the trustee. So, too, of course, can a third-party, such as a bank or trust company. There is no restriction against the donor (or grantor) serving as the trustee and the income beneficiary. And although the trust is irrevocable, the donors may change the charitable beneficiaries at any time.
Since the CRT will eliminate any testamentary disposition of property to the donor's heirs, it may be desirable to replace the value of the asset contributed. The use of an irrevocable life
insurance trust in conjunction with a charitable remainder trust could replace the asset's value for the heirs.
Charitable remainder trusts provide investors an efficient way to transfer appreciated property, benefit from the charitable income tax deduction, and reduce estate taxes while still reaping the benefits of the underlying assets for income purposes.
Posted By: Cathy Pareto
Web: http://www.cathypareto.com
Contact: e-mail
| About the Author: |
| Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. Money management does not have to be an intimidating and mystifying process. Cathy's belief is that there is more
to investment management and financial planning than just the numbers. It takes commitment, clear communication and trust between the Advisor and the Client to plan out a strategy, and it requires the experience of a competent Advisor to execute that strategy.
For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally,
she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.
Educational Background
Cathy earned her BA in Finance and later her Executive MBA at Florida International University, graduating in the top 20% of her class and as a result she was inducted into the prestigious Beta Gamma Sigma Graduate Business Honors Society.
In the Media
Cathy Pareto’s articles have been published in periodicals and websites, including Women in Business,Investopedia.com, Miami Medicine, Florida Medical Business, AccountantsWorld.com, My Financial Advisor, Indexfunds.com, and Fundsinteracctive.com. Her media contributions include quotes in BusinessWeek, The Wall Street Journal, The Sun Sentinel, CNNfn, Latina Magazine, Hispanic Trends, AARP's
Segunda Edad, and many other financial publications. She has appeared on television and radio shows including CNBC’s “Power Lunch”, WLRN/NPR’s “Topical Currents", “Wealth & Wisdom”, Total Picture Radio, Landed Radio and more.
www.cathpareto.com
Professional Memberships
Greater Miami Estate Planning Council - Current Member of the Board of
Directors
United Way of Miami Dade Young Leaders - Current Member
NAPFA National Association of Personal Financial Advisors - Current South
East Region Board Member
Florida International University Executive MBA - Current Member of
Professional Advisory Board
Financial Planning Association - Current Member |
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