Charitable Remainder Trusts
It is possible to make a gift to the ICLT on a deferred basis so that a spouse or child can receive the benefit of income from an asset for a period of time prior to transfer to the ICLT. The general term for such a gift is “Charitable Remainder Trust.”
Charitable Remainder Trusts, while irrevocable, provide a way to meet family planning goals and at the same time provide an opportunity to support the ICLT in the future. You can create such a trust during your lifetime or upon your death by transferring assets to a trustee who, under the terms of the trust instrument, invests and manages those assets for the benefit of your beneficiaries.
With a Charitable Remainder Trust, you irrevocably transfer cash, securities, or property to your Trust. The Trust pays you (or your designated beneficiaries) a payout which represents a percentage of the trust assets. The percentage can be a “Unitrust” payout or an “Annuity” payout. With a Unitrust payout, the trust reflects the market, so your income is variable. Because income increases with trust growth, the Unitrust can provide an excellent hedge against inflation. With an “Annuity” payout,” the payout is based on the value of the assets at the time the “Annuity Trust” is established and remains fixed for the term of the agreement. At the termination of the Trust (either at the death of income beneficiaries or after a specified term of years), the remainder is transferred to the ICLT.
When you create a Charitable Remainder Trust, you are entitled to a significant income tax deduction generally equal to the current value of the property you contribute less the present value of the Unitrust or Annuity payouts to be made to you or to your beneficiaries. The value of the Unitrust or Annuity payouts depends upon the expected term of the trust, the percentage to be paid, and the fair market value of the assets used to fund the trust. The value of the deduction you may claim is limited to a percentage of your Adjusted Gross Income (AGI).
When the Unitrust or Annuity interest ends, the trust terminates and the principal is available for the use of the ICLT.
Charitable Lead Trusts
A Charitable Lead Trust can be described as a mirror image of the Charitable Remainder Trust. During the term of the Charitable Lead Trust, an annuity or Unitrust amount is paid to the charity and, upon the expiration of the term, the remaining assets of the trust are paid over to the non-charitable remaindermen – usually the donor’s children. Upon funding a Charitable Lead Trust, the donor generally does not receive an income tax deduction. However, the amount of the gift to children is reduced for gift tax purposes by the value of the annuity or unitrust interest given to the charity. The longer the trust term, and the higher its payout rate, the greater the gift tax savings. Further, future appreciation on the contributed assets is not subject to further gift or estate taxes when the trust terminates. This is an excellent strategy to enable a Trustor to save on gift and estate taxes while benefiting the ICLT.