 |
|
|
|
|
|
 |
|
|
· Types of Charitable Lead Trusts
· Charitable Lead Unitrust
· Charitable Lead Annuity Trust
· Other Facts you should know
Charitable Lead Trust
A Charitable Lead Trust ("CLT") is a tax-advantaged planning tool that produces both charitable and estate planning benefits. A CLT uses your assets to provide income to a charity during your lifetime (or for any other specified period of time) and then at the end of the trust period, the principal (assets) reverts either to you or to any designated beneficiaries.
Most charitable lead trusts leave assets to beneficiaries other than the original donor. This is called a non-grantor lead trust. A trust in which the principal reverts to the donor is called a grantor lead trust
Advantages
- Reduce your taxes - Gift and estate tax deduction on the value of the assets transferred
- If you establish a non-grantor lead trust during your lifetime, you receive a gift-tax deduction for the current value of the income interest payable to the charity. If the trust is established at your death, the estate can take the value of the income interest as an estate-tax deduction.
- If you establish a grantor trust, you can take an income-tax deduction for the current value of the income interest payable to the charity but only if you also declare all income and gains the trust ever makes and take no additional charitable deduction for the annual distribution to charity from the lead trust.
- Although there is no income tax deduction when you create a charitable lead trust, your gift or estate tax is greatly discounted and any growth is passed to your heirs gift and estate tax free. It is one of the only transfer devices currently used that can discount the value of the original assets and result in little or no taxes.
- Perpetuates a Tradition of charitable Giving
- Management of Assets Transferred
The typical donor:
- Has a moderate to large taxable estate.
- Has given to charities in the past.
- Holds assets with growth potential.
- Desires to pass certain assets to heirs.
Types Of Charitable Lead Trusts
There are two formats for the distribution:
- A Charitable Lead unitrust - A unitrust values the trust's assets annually and pays the designated charity a fixed percentage of that amount.
- A Charitable Lead Annuity Trust - An annuity trust pays the charity a fixed annual amount, based on initial funding, regardless of the trust's year-to-year value.
Charitable Lead Unitrust (CLUT)
In considering this trust, keep in mind that, basically, the charitable lead unitrust is a mirror image of a charitable remainder unitrust. The difference that income from the trust is first distributed to the qualified charity.
When the trust terminates, the principal is distributed to remainder beneficiaries, who are usually the grantor's children or grandchildren. Income paid by the trust to the charity is a fixed percentage of the trust's principal, revalued each year. Additional contributions can be made to a charitable lead unitrust.
Tax Advantages
- For gift tax purposes, the fair market value of the remainder interest is discounted to reflect the terms of the transfer.
- Can generate an income tax deduction each year to offset trust income.
- Can reduce estate tax liabilities.
Charitable Lead Annuity Trusts (CLAT)
In considering this trust, keep in mind that, basically, the charitable lead annuity trust is a mirror image of a charitable remainder annuity trust. The difference is that income from the trust is first distributed to a qualified charity. A non-grantor charitable lead annuity trust is the form of charitable lead trust most commonly used.
When the trust terminates, the principal is distributed to remainder beneficiaries, who are usually the grantor's children or grandchildren. Income paid by the trust to the charity is a fixed amount stated in dollars or stated as a percentage of the trust's initial investment fair market value. Additional contributions cannot be made to a charitable lead annuity trust.
The real estate planning value of using a charitable lead annuity trust is that the original asset values receive a gift and estate tax deduction based on the value of the income stream given to charity. Excess earnings and growth add to the value of the trust corpus. Each year as the charitable lead annuity trust corpus grows, the percentage paid to the charity represents a smaller percentage of the total trust value. At the end of the trust term, the trust terminates and all the assets in the trust, including growth, are transferred to your heirs without further gift or estate tax.
Tax Advantages
- For gift tax purposes, the fair market value of the remainder interest is discounted to reflect the terms of the transfer.
- Can generate an income tax deduction each year to offset trust income.
- Can reduce estate tax liabilities.
Unlike a charitable remainder trust, a charitable lead annuity trust creates no income tax deduction to you, but the income earned in the trust is not attributed to you. The trust itself is taxed according to trust rates. The trust receives an income tax deduction for the income paid to charity.
Other Facts You Should Know About a Charitable Lead Trust
There are two general types of charitable lead trusts-a grantor charitable lead trust and a nongrantor charitable lead trust. Each can be in the form of a unitrust or an annuity trust. A grantor charitable lead trust provides an income tax deduction on its creation to the grantor (donor); however the grantor is taxed on the income paid to the charity. There are limited uses for grantor charitable lead trusts in both the unitrust and annuity variations. Therefore, a majority of estates use a nongrantor charitable lead annuity trust.
A nongrantor charitable lead annuity trust is primarily used in conjunction with an overall estate plan to provide a vehicle that not only greatly reduces the gift and estate tax on the transfer of high growth assets to heirs, but also provides a transfer of the growth tax free. Often you can remain as the trustee during the term of the trust to control management of its assets. Not only is the income from the trust paid to charity and not taxed to you, but it may also replace or enhance outright charitable gifts you wish to make.
The gift and estate tax deduction on the original transfer of assets is an Internal Revenue Service calculation based on the fair market value transferred minus the present value of the income stream to charity. The longer the term, the greater the deduction. Although this method is an attractive way to transfer assets to heirs and make a substantial gift to the Church or one of its institutions, it works best when used in estates of approximately $5 million or more. Before you begin, you should be sure to involve your financial and legal advisors as part of your gift-strategy team. A nongrantor charitable lead annuity trust is only effective as part of an overall financial and estate plan.
|
|
|
|
