Robert J. Kolasa, Ltd.
Estate Planner, CPA & Former IRS Attorney
Give to Charity in a Tax Efficient Manner
Taking advantage of the charitable deduction is not limited to outright gifts of money or other property to charity. The tax laws permit charitable gift devices which not only provide a charitable deduction but allow the transferor to obtain additional benefits. Two popular specialized charitable giving devices are Charitable Remainder Trusts (“CRTs”) and Charitable Lead Trusts (“CLTs”).
Robert J. Kolasa, Ltd. has had substantial experience in assisting clients in implementing charitable trust strategies.
Click "Advise your Clients on How They Can Increase Their Cincomies, Avoid Capital Gains Taxes, Reduce Estate Taxes and Become a Saint" (published article) to to review my discussion of the Charitable Remainder Trust rules.
Charitable Remainder Trusts ("CRTs")
A Charitable Remainder Trust (“CRT”) is an irrevocable, tax-exempt trust comprised of two parts: (1) the income interest, and (2) the remainder interest. The income interest is the income paid to the individuals who established the trust (or their designated beneficiaries) for their lifetime or a term of years. The remainder interest is the property remaining in the CRT when the trust terminates. The remainder interest is given to the qualified charity (including family foundations and donor advised funds) of the donor’s choice as specified in the trust document.
What are the personal financial benefits of CRTs?
Tax-Free Asset Conversion: Through a CRT, appreciated assets may be sold free of capital gains taxes, leaving the full amount of the sale proceeds to provide benefits for you and your designated charity. Asset conversion is the most visible financial advantage of using a CRT.
Current Income Tax Deduction: A gift to a CRT can provide you with a current income tax deduction that can offset other forms of income.
Increased Cash Flow: You may own a highly appreciated asset that generates little or no income, but are reluctant to sell it because the capital gains tax could consume a large share of its value and resulting income. The ability to sell the asset free from capital gain taxes enables a Charitable Remainder Trust to generate more income for recipients.
Lifetime Cash Flow Planning: With careful design and investment management, the CRT can defer income for later distribution. This feature enables possible accumulation of income for retirement planning or for intermittent financial needs that may occur along the way. Income deferral can also enhance the value of the ultimate charitable gift.
Retirement Planning and Asset Management: Among other things, retirement denotes reduction of management responsibilities, not only in the work place, but also with personal assets. The CRT not only provides the means to dispose of management intensive assets, it also supplies a mechanism to provide professional asset management during a person’s later years when it may be most needed or desired.
The CRT offers an effective alternative to the payment of gift and estate taxes. Amounts transferred to a CRT are not fully subject to gift or estate taxes. The combination of capital gains tax, gift tax and estate tax avoidance can be very compelling for those who wish to control their social capital.
In addition to the gift and estate tax savings generated by the trust itself, the cash flow created by the CRT can be coordinated with other estate planning techniques such as gifts of cash to an irrevocable trust which uses the cash to to purchase life insurance on the grantor's life (so that if you die soon after contributing assets to a CRT, the insurance proceeds "replace" the trust assets going to charity). This concept is known as a "wealth replacement trust" because it enables you to provide a significant legacy to charity without disinheriting your heirs.
Even if life insurance is not utilized, the tax and financial benefits of a CRT can be substantial. However, my experiences have shown that CRTs work best with families already having existing charitable intentions. A CRT should probably not be established solely for its substantial tax benefits if there is no real charitable intent among family members.
Charitable Lead Trusts ("CLTs")
Charitable Lead Trusts (“CLTs”) are an excellent estate planning vehicle to pass assets to heirs at a reduced transfer tax, while making a significant gift to charity. A CLT is a powerful instrument for donors who anticipate high estate and gift taxes in transferring their wealth to heirs. The two main types of Charitable Lead Trusts are the Grantor Lead Trust, in which the assets of the trust revert to the donor at the end of the trust term; and the Non-grantor Lead Trust, in which the assets of the trust are transferred to one or more beneficiaries designated by the donor. With a CLT, the charity receives an income stream for the life of the trust.
A Charitable Lead Trust is an irrevocable, taxable, split interest trust. The donor funds a trust that will pay an income stream to a charity of their choice for a specified term. The assets of the trust are invested and managed by a trustee. At the end of the trust term, remaining trust assets revert to the donor, or are transferred to family member beneficiaries designated by the donor.