Charitable trusts are powerful estate planning tools to help you achieve philanthropic goals while reaping significant tax benefits. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) sit at the heart of these strategies. This blog delves into charitable trusts and highlights the tax benefits they offer.
Charitable Remainder Trusts
A CRT is a type of irrevocable trust that provides an income stream for the donor or other beneficiaries with the remainder of the trust assets going to a charitable organization. The income can either be a fixed annuity (charitable remainder annuity trust or CRAT) or a percentage of the trust assets recalculated annually (charitable remainder unitrust or CRUT).
One of the primary tax benefits of a CRT is the immediate charitable income tax deduction. You can take an income tax deduction for the value of the assets that will go to the charitable beneficiary, spread out over five years.
Moreover, CRTs offer a way to bypass capital gains tax. When appreciated assets are donated to a CRT and then sold by the trust, no immediate capital gains tax is incurred. This allows the full amount to be reinvested, often leading to higher income payments. Additionally, the assets in the CRT are not part of the donor’s estate, reducing potential estate taxes.
Charitable Lead Trusts
On the flip side, a CLT is a mirror image of a CRT. A CLT provides an income stream to a charitable organization for a term, after which the remainder goes to non-charitable beneficiaries, such as heirs.
The tax benefits of a CLT are different from those of a CRT. If the CLT is structured as a grantor trust, the donor receives an immediate charitable income tax deduction for the present value of the income interest going to the charity.
However, future income generated by the trust is taxable to the donor. A non-grantor CLT does not provide an immediate income tax deduction, but the income paid to the charity is deductible by the trust, potentially offsetting tax on trust income.
A significant advantage of a CLT is its role in estate planning for high-net-worth individuals that are exposed to estate taxes. On the federal level, the estate tax is applied on the portion of an estate that exceeds $12.93 million. This is called the exclusion, and the Connecticut state estate tax exclusion is now equal to the federal exclusion.
First, you are removing assets from your estate when you fund the trust. Secondly, if the assets outperform the anticipated appreciation accrual that is calculated by the IRS using the hurdle rate, there will be a remainder that transfers to the non-charitable beneficiary free of transfer taxes.
Bringing It All Together
To sum up, charitable trusts offer a win-win solution for philanthropic individuals seeking tax efficiency. CRTs allow for an income stream for the donor or beneficiaries, an immediate charitable deduction, bypassing capital gains tax, and potential estate tax reduction.
CLTs, in contrast, offer immediate charitable deductions (for grantor CLTs), potential offsetting of trust income (for non-grantor CLTs), and effective wealth transfer to heirs at a reduced tax cost.
Attend a Complimentary Seminar!
When you understand all the facts, you will immediately recognize the value of a professionally prepared estate plan. You are already heading in the right direction by reading this post, and we add additional content on an ongoing basis, so you may want to bookmark this blog.
In addition to the written materials, we offer in-person learning opportunities at our educational events. They are held at comfortable locations throughout our service areas, and there is no charge, so this is a great opportunity to build on your knowledge.
You can see the dates and obtain details and registration information if you visit our Estate Planning Seminars page.
Ready to Act Now?
Learning is great, but at some point, action is required. If you have determined that time is now, we are here to help. You can send us a message through our contact page to request a consultation at our Glastonbury or Westport, CT estate planning offices, and we can be reached by phone at 860-548-1000.
- Estate Planning for Millennials: The Right Time Is Now - February 20, 2024
- VA Veterans Pension: A Guide for Seniors and Disabled Wartime Veterans - February 1, 2024
- Navigating the Crossroads: Estate Planning After Divorce - January 16, 2024