Giving to charity using split interest trusts (where the current or income beneficiary and the ultimate or remainder beneficiary are different, with one of them being a charitable organization) provides significant tax planning opportunities to the donor and the ability for charities to receive larger gifts than may otherwise be possible.
In the typical charitable trust plan, the overall charitable benefit of the trust is reduced to current-year dollars, giving the donor the benefit of the entire charitable tax deduction in one year. These trusts can be designed to be effective during the life of the donor, typically providing income tax benefits, or effective upon the death of the donor, thereby providing estate tax benefits.
A Charitable Lead Trust is a trust that is set up to provide an annual payment to one or more charitable institutions of either a set amount (an annuity from a Charitable Lead Annuity Trust, or “CLAT”) or a set percentage of the trust assets, valued annually (a unitrust interest from a Charitable Lead Unitrust, or “CLUT”). At the end of the trust term (which can be either a set number of years or the life of the donor), the funds in the trust are turned over to one or more noncharitable beneficiaries (often the donor or his or her family).
A qualified CLAT or CLUT is one that is designed so that the future charitable gifts are deemed for tax purposes to be completed at the time the trust is established. Therefore, the donor receives one charitable deduction in the year the trust is established.
If the CLAT or CLUT is established during the life of the donor, the greatest benefit is usually an income tax deduction for the present value of the future charitable contributions.
If the CLAT or CLUT is established through a testamentary document such as a Last Will or Revocable Living Trust, the greatest benefit is usually an estate tax deduction for the present value of the future charitable contributions.
A nonqualified charitable lead trust is similar to the qualified trusts discussed above. However, with the nonqualified charitable lead trust, the trust is designed so that the future charitable deductions are not deemed complete at the time of the establishment of the trust. Therefore, the charitable deductions are not available until distributions are actually made to the charitable beneficiaries (which occurs at least annually).
A charitable remainder trust is a split interest trust that provides an annual payment to one or more noncharitable beneficiaries of either a set amount (an annuity from a Charitable Remainder Annuity Trust, or “CRAT”) or a set percentage of the trust assets, valued annually (a unitrust interest from a Charitable Remainder Unitrust, or “CRUT”). At the end of the trust term (which can be either a set number of years or the life of the donor), the funds in the trust are distributed to one or more charitable institutions (which were determined when the trust was established).
Charitable trusts are often used to remove low basis property from an estate. Here in Colorado, estate planners often see real property that has become very valuable in the last generation (typically farm land) but that has a very low basis for tax purposes (because it was purchased by the family or received from previous generations prior to the explosion of real estate values). This land is often contributed to a charitable trust. The property is then sold inside the trust, which is a nontaxable disposition for the donor. The donor receives a charitable tax deduction, removes a valuable asset from the future taxable estate, and typically receives an income distributions annually for life from the proceeds of the sale of the property by the trust.
A charitable lead trust can be used to minimize the tax burden from a large receipt of income, such as a severance benefits. The donor (the recipient of the severance or other benefit) can move the income into a charitable lead trust, generating a charitable income tax deduction and thereby reducing the amount of income tax due in the year of receipt. The donor will then be able to pay the income tax due over the term of the trust.
Additionally, a donor may use an existing Donor Advised Fund (a “DAV”) as the charitable beneficiary. In this manner, the donor has the ability to suggest which charities should benefit on an annual basis, instead of determining which charities to benefit at the establishment of the trust.
