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Articles: Charitable trusts: take the lead

Suppose you would like to make a large donation to your favorite charity, but you are concerned about your family’s future well-being. If you do not have ample funds to achieve both objectives, consider the benefits of a charitable lead trust (CLT).

This type of trust - which is the flip side of the better-known charitable remainder trust (CRT) - may be established during your lifetime or through a will (i.e., a “testamentary trust”).  There is increased interest in CLTs now due to an anticipated rise in tax rates and the advent of the 3.8% Medicare surtax on certain investment income.

How it works:  In a CLT, the charity receives a steady stream of income for a set period of time. At the end of the trust term, the funds come back to the beneficiaries you have designated, such as your spouse, children or grand- children.  In contrast, a CRT provides income to beneficiaries for a specified period of time while the charity receives the trust funds at the end of the term.

The gift-or estate-tax deduction makes it possible to transfer the remainder interest to family members at a relatively low tax cost.  Taking this and various other factors into account, the children can wind up with an amount close to what they would have received had they been given the property outright.

Key point: The estate- or gift-tax deduction is allowed only if the charity’s interest is either an annuity or unitrust interest. An annuity interest requires fixed annual payments. On the other hand, a unitrust requires payment each year of a fixed percentage of the trust assets. The trust term can last for either

  • a fixed number of years

  • the life of the donor, donor’s spouse or a lineal ancestor (or spouse) of all of the remainder beneficiaries.

Which type  of trust  is preferred?   Of course, your choice of trust depends on your situation.  However, one possible advantage of an annuity-type trust is that the beneficiaries may ultimately cash in on the appreciation of the trust assets.

Conversely, if the trust does not earn sufficient funds to cover the charity’s payments, it will have to dip into principal. With the unitrust arrangement, changes in the value of the property have no such effect. Also, the deduction for an annuity-type trust is determined by a special IRS table. These figures are adjusted each month to reflect changes in interest rates.  The lower the interest rate, the greater the deduction for you or your estate.

As you might imagine, this is not a do-it-yourself proposition. If you are interested in settling up a charitable trust, be sure to obtain expert advice.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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