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For the Poor Charity Box Basilica of St. Adelbert Grand Rapids December 29, 201014

Photo by Steven Depolo is licensed under CC 2.0

If the estate tax is a concern for you, determining how to mitigate your tax bill is a significant issue. One great way to do this is through charitable donations. With these gifts you have the opportunity to make a positive difference, to share your success with others less fortunate, and to lower your tax bill.

For larger estates, careful planning of charitable gifts beyond simply writing a check may be quite helpful in mitigating tax liability. In this post, I will discuss some planned giving strategies, particularly the charitable remainder trust, the pooled income fund, and charitable gift annuities.

Charitable Remainder Trusts

Charitable remainder trusts are one of the most valuable of the planned giving strategies. This technique allows you to set up a trust to benefit you or someone else—such as a spouse or children—with the remainder of the trust going to the charity of your choosing at the expiration of the trust’s term. The trust’s term is often set to expire at the death of the beneficiary.

There are two types of charitable remainder trusts: the charitable remainder annuity trust, or CRAT as it is sometimes called, and the charitable remainder unitrust, or CRUT. The only significant difference between the two is the way in which distributions are calculated. CRATs require an annuity payment to be made to the beneficiary, which is a payment of a fixed amount per year—for example, $10,000 per year.

A CRUT on the other hand requires a distribution of a percentage of the trust’s value. So, for example, a CRUT could be set up to distribute 10% of its value annually. Consequently, the size of the distributions will vary every year based on the performance of the trust’s investments and a variety of other factors.

Both types of trusts must meet the following requirements to qualify as charitable remainder trusts:

  1. The amount paid to the noncharitable beneficiaries cannot be less than 5% of the trust property but also not more than 50%.
  2. If the trust will be paid out for a period of time—that is, for a fixed term of years rather than “for life”—it must be for less than 20 years.
  3. The remainder of the trust has to be transferred to or held in remainder for charity.
  4. The remainder of the trust must be equal to or greater than 10% of the initial value of the assets transferred to the trust.

Charitable remainder trusts offer some great advantages, including the ability to remove property from your estate without incurring gift tax liabilities while also gaining an income tax deduction. Like many planned giving strategies, however, forming and implementing a charitable remainder trust can be quite complex and should be done with the assistance of a competent attorney or tax advisor.

Pooled Income Funds

Pooled income funds are trusts that are established by a charity that allow several donors to pool their funds together. (See an example here.) The charity manages the trust using whatever investments it wants. The income beneficiaries then receive income from the pooled income trust for life or another predetermined term.

After the beneficiaries’ term ends, the remainder goes to charity. Actuarial value of the remainder value determines the amount of the tax deduction allowed. The actuarial value can be difficult to calculate and can be affected by interest rates, term of years of the trust, and the amount transferred into the trust.

Charitable Gift Annuities

The final of the planned giving strategies I will discuss in this post is the charitable gift annuity. A charitable gift annuity is the opposite of a charitable remainder trust. The charity gets the income of the trust, while the remainder goes to a noncharitable beneficiary at the expiration of the trust. This is a good tool for passing wealth to the next generation.

This type of planned giving strategy allows for an income tax deduction if it is a grantor trust. In that case, the value of the deduction is equal to the actuarial value of the charity’s interest. Income tax deductions are not available for non-grantor trusts, but such trusts still serve the purpose of helping to transfer wealth to the next generation.

See Also:

The Federal Estate Tax
Charitable Deductions


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