Rethinking Your Estate Plan - Question 4

The questions posed in the Money Magazine are very insightful. That is why I have been sharing these questions with you in my blog. I hope you are looking at your answers for your next steps.

QUESTION 4. WANT TO GIVE TO CHARITY?

"If you'd like to donate some of your estate, one of the smartest ways is through a traditional IRA. Say you named your niece as the beneficiary of your IRA. She'd owe income tax on withdrawals, and the value of the IRA would be included in your estate for tax purposes.
But if you name a qualified charity instead, it would owe no tax on withdrawals and you could reduce the taxes your estate would pay. (This strategy makes less sense with Roth IRAs; because they're funded with after-tax money, whoever withdraws the dough won't owe income tax on it.) Prefer to give the money now? Through the end of 2009 you can transfer up to $100,000 directly from a traditional IRA to a charity as long as you're 70½ or older. You won't be able to claim a tax deduction for the contribution, but you won't owe income tax on the withdrawal either. Another option you may want to ask your lawyer about: a charitable remainder trust. You put assets into the trust, which then pays you an income for a specified number of years or the rest of your life. After the trust matures, the assets go to the charity you've chosen. (At least 10% of the amount you put into the trust must go to the charity.)
This trust has several advantages. When you fund it, you can take a tax deduction right away based on the present value of the gift that the charity will ultimately receive. You can get a reliable stream of income (you must draw down at least 5% of the trust's value each year). And you can shift into the trust assets that have appreciated quite a bit - such as shares of Exxon Mobil that you've held for decades - and sell them in the trust without incurring capital gains right away. "

Check out some of our archives for more information on charitable estate planning. Leave a comment or contact us at http://www.ythlaw.com/

Charitable Estate Planning - Charitable Trusts

Another method for charitable estate planning is the establishment of chartible trusts. These trusts have significant tax benefits. There are several charitable trusts to consider, such as the Charitable Remainder Annuity Trust (“CRAT”), Charitable Remainder Unitrust (“CRUT”) and Charitable Leads Trust. The first 2 trusts, CRAT and CRUT, permit you to provide a remainder interest to a charitable organization while you continue to benefit during your lifetime from the asset to be transferred. These trusts are considered split interest trusts. They have both charitable and non-charitable beneficiaries. Your charity is the charitable beneficiary and you are the non-charitable beneficiary.

A third type of trust is the Charitable Leads Trust. It is also a split interest trust. However, it is the reverse of the CRAT and CRUT. The Charitable Leads Trust pays income first to the charity for a term of years and then the remainder amount is paid back to you or, if the trust is established after your death, to your beneficiaries. This means that the charity gets paid first and then the non-charitable recipient get paid. Therefore, the charity leads the non-charitable recipient. That is why this particular trust is referred to as a Charitable Leads Trust. The use of CRAT, CRUT and Charitable Leads Trust can offer financial advantages to you during their lifetime.

With the CRAT and CRUT, you, as the non-charitable beneficiary, have the right to receive, at least annually, an annuity or unitrust amount for life or for a term of years (not more than 20 years). At the end of the established term, the remaining assets of the trust are paid to or held for the benefit of charity. If the interest is an annuity interest, then the trust is considered a CRAT. When it is established, you choose the payout rate. The higher the payment to you, the lower the charitable deduction will be for tax purposes. If the interest is a unitrust interest, the trust is considered a CRUT. In the CRUT, the assets are revalued every year to determine the payout rate each year.

Whether you use a CRAT, CRUT or a Charitable Leads Trust, they should choose appreciating assets to give and place in the trust. Since charities are not taxed, this will avoid a capital gain tax when the asset is sold by the charity. Therefore, for appreciating assets like real estate and stock, Max and Margaret get a charitable deduction during their lifetime and the charity avoids a capital gain tax.