Charitable Lead and Charitable Remainder Trusts
For those with charitable inclinations, charitable trusts create opportunities to eliminate capital gains tax and increase their income streams.
Charitable Remainder Trust (CRT)
The funding of a Charitable Remainder Trust allows a Taxpayer to benefit charities while reducing estate taxes, eliminating capital gains tax and claiming charitable deductions. After assets are contributed to a Charitable Remainder Trust, they may be sold by the trust without paying capital gains tax. This allows the all of the sales proceeds to be reinvested. Assets that are highly appreciated in value and that have a low cost basis are ideal for contributing to a Charitable Remainder Trust.
After the contribution of assets to a Charitable Remainder Trust, the Trust pays the current income to the Taxpayer and the Taxpayer's spouse (the "Income Beneficiaries") with the remainder of the trust being distributed to one or more charities (the "Remainder Beneficiaries"). The Income Beneficiaries may change the Remainder Beneficiaries during their lifetime.
The Income Beneficiaries receive a set percentage of income for their lifetime from the trust and the Remainder Beneficiaries receive the remaining trust corpus or principal after the Income Beneficiaries' interest terminates. The amount of income to be distributed depends upon the payout percentage the Income Beneficiaries choose and the amount of income the assets of the trust can generate. At least five percent of the net fair market value of the Charitable Remainder Trust's assets must be distributed to the Income Beneficiaries' each year, however, the higher the payout rate, the lower the charitable deduction will be. The Charitable Remainder Trust is an ideal vehicle for producing additional income to supplement a Taxpayer's retirement income.
Because the Charitable Remainder Trust also benefits charity, the Taxpayers are entitled to an income tax deduction when the trust is funded. The amount of the deduction is the present value of the remainder interest to the charity but may also vary depending on the type of property contributed to the trust and the type of charity name as Remainder Beneficiary. Deductions not used in the year of contribution may be carried forward and deducted in later years.
Some portion of the additional income generated by diversifying the assets placed in a Charitable Remainder Trust may be used to purchase a life insurance policy. The life insurance proceeds can replace the assets going to charity, and if properly structured, will not be included in the taxpayers estate for estate tax purposes.
Charitable Lead Trust (CLT)
The funding of a Charitable Lead Trust also allows a Taxpayer to benefit charities, while reducing estate taxes, eliminating capital gains tax and claiming charitable deductions. The difference between a Charitable Remainder Trust and a Charitable Lead Trust is that the charities are the Income Beneficiaries during the Taxpayers' lives and upon their death, the named beneficiaries receive the remainder of the Charitable Lead Trust's assets.
As a Certified Tax Specialist, John Kachmarsky possesses the credentials and specialized knowledge to help you form creative estate planning and asset protection strategies for the greatest benefit of your family and heirs.
Contact us today discuss your immediate estate planning needs and long-term wealth preservation goals.
