Give ‘til It (Doesn’t) Hurt
Estate Tax Planning Through Charitable Donations
Now that the dust has settled and we know who will be in charge in Washington for the next couple of years at least, it’s a good idea to reconsider our estate plans and how they might be updated to counter the heightened possibility of an increase in estate taxes. Our last article dealt with non-charitable techniques, so this time we’ll discuss options for charitable giving plans.
Charitable giving can yield both income and estate tax savings, depending on how the gift is structured. The most common are direct gifts of cash or appreciated assets to a charity. Direct gifts can also be to donor advised funds to spread the benefit among several charities. Less common are split-interest gifts through charitable trusts.
What are Split-interest Gifts?
Split-interest gifts, as the name implies, divide the benefit of the gift between the donor and the charity. Either the charity gets the benefit upfront (a Charitable Lead Trust or “CLT”), or it gets the benefit at the end (a Charitable Remainder Trust or “CRT”).
Understanding Charitable Remainder Trust
CLT’s provide either a fixed or variable amount to the charitable beneficiary each year for the term of the trust, and the non-charitable beneficiary gets the remaining trust assets at the end. Depending on how the payments are structured and how the CLT’s investments perform, it’s possible to benefit the remainder beneficiary as much as the charity. Further, if the donor agrees to be taxed on all the CLT’s income the contribution to the trust can generate a present income tax deduction which may be useful in a high-income year. A CLT must be irrevocable when it is formed, and changes to the charitable beneficiary will not be possible barring some change in the charity’s exempt status.
A CRT, by contrast, retains the private benefit for the donor or the donor’s family for a time before paying out to the charitable beneficiary at the end of the trust’s term. The private benefit can be fixed or variable depending on trust’s income or the value of the trust’s assets from year to year. The present value of the charitable remainder interest can generate an income tax deduction in the year the trust is created and funded, and the CRT is tax-exempt so investments grow tax free inside the trust.
Under current law each dollar given to a charity saves around 40 cents in estate taxes for those with potentially taxable estates. If you have charitable goals it may make sense to create a charitable trust. See your tax attorney for more information.