Category: Charitable Remainder Trust

Minimizing taxes should be a part of your plan

Minimizing Taxes should be a Part of your Plan

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones. Minimizing taxes should be a part of your plan.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your jurisdiction, probate can be a long, costly and stressful process. In Ohio, the law requires probate to be open for at least six months after the date of death, even if your estate dots every “i” and crosses every “t.”

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, if your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered number makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home. If you would like to read more about taxes and their influence of estate planning, please visit our previous posts. 

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”

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Maximize the Benefits of a Trust Fund

Maximize the Benefits of a Trust Fund

To maximize the benefits of a trust fund, you’ll need to understand how trusts funds work and how to create a trust fund the right way, advises this recent article from Yahoo! Money titled “How to Start a Trust Fund the Easy Way.” You don’t have to be a millionaire to start a trust fund, by the way. “Regular” people benefit just as much as millionaires from using trusts to protect assets and minimize taxes.

A trust fund is an independent legal entity created to own assets and ensure money and property are used to benefit loved ones. They are commonly used to transfer assets to family members.

Trust funds are created by grantors, the person who sets up the trust and transfers money or assets into it. An experienced estate planning attorney will be essential, since creating a trust is not like going to the bank and opening an account. You need the assistance of a professional who can create a trust to reflect your wishes and comply with your state’s laws.

When assets are moved into a trust, the trust becomes the legal owner of the property. Part of creating the trust is naming a trustee, who manages the trust and is legally bound to follow the wishes of the trust following the grantor’s wishes. A successor trustee should always be named, in case the primary trustee becomes unwilling to serve or dies.

Subject to compliance with specific requirements, assets owned by an irrevocable trust are not countable towards Medicaid, if someone in the family needs long-term care and is concerned about qualifying. Any transfer must be done at least five years in advance of applying for Medicaid. An elder law attorney can help in preparation for this application and to ensure eligibility. This is a very complex area of law. Do not attempt it alone without the assistance of an elder law attorney.

Trusts can have a long or short life. Some trusts are held for a child until the child reaches age 25, while others are structured to distribute a portion of the assets throughout the beneficiary’s lifetime or when the beneficiary reaches certain milestones, such as finishing college, starting a family, etc.

A revocable trust allows the grantor to have the most control over the assets in the trust, but at a cost. The revocable trust may be changed at any time, and property can be moved in and out of it. However, the assets are available to creditors and are countable towards long-term care because they are in the control of the grantor.

The irrevocable trust requires the grantor to give up control, in exchange for the benefits the trust provides.

There are as many types of trusts as there are situations for trusts. Charitable Remainder Trusts reduce estate taxes and allow beneficiaries to receive an income stream for a designated period of time, at the end of which the remainder of the trust’s assets go to the charity. Special Needs Trusts are created for disabled persons who are receiving means-tested government benefits. There are strict rules about SNTs, so speak with an experienced estate planning attorney to ensure that your loved one continues to be eligible, if you want them to receive assets from you.

Trusts are often used so assets will pass through the trust and not through the probate process. Assets owned by a trust pass directly to beneficiaries and information about the assets does not become part of the public record, which is part of what occurs during the probate process.

Your estate planning attorney will help you maximize the benefits of a trust fund, achieve your specific wishes and are in compliance with your state’s laws. A boilerplate template could present more problems than it solves. For trusts, the experienced professional is the best option. If you would like to learn more about the benefits of a trust, please visit our previous posts.

Reference: Yahoo! Money (March 18, 2022) “How to Start a Trust Fund the Easy Way”

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Alternatives to replace Stretch IRA

Alternatives to replace Stretch IRA

The idea of leaving a large inheritance to loved ones is a dream for some parents. However, without careful planning, heirs may end up with a large tax bill. When Congress passed the SECURE Act in December 2019, one of the changes was the end of the stretch IRA, as reported by Kiplinger in a recent article titled “Getting Around the Stretch IRA Block.” There are alternatives to replace a stretch IRA.

Before the SECURE Act, people who inherited traditional IRAs needed to only take a minimum distribution annually, based on their own life expectancy. The money could grow tax-deferred for the rest of their lives. The tax impact was mild, because withdrawals could be spread out over many years, giving the new owner control over their taxable income. The rules were the same for an inherited Roth IRA. Distributions were based on the heirs’ life expectancy. Roth IRA heirs had the added benefit of not having to pay taxes on withdrawals, since Roth IRAs are funded with post-tax dollars.

After the SECURE Act, inherited traditional and Roth IRAs need to be emptied within ten years. Heirs can wait until the 10th year and empty the account all at once—and end up with a whopping tax bill—or take it out incrementally. However, it has to be emptied within ten years.

There are some exceptions: spouses, disabled or chronically ill individuals, or those who are not more than ten years younger than the original owner can stretch out the distribution of the IRA funds. If an underage minor inherits a traditional IRA, they can stretch it until they reach legal age. At that point, they have to withdraw all the funds in ten years—from age 18 to 28. This may not be the best time for a young person to have access to a large inheritance.

These changes have left many IRA owners looking for alternative ways to leave inheritances and find a work-around for their IRAs to protect their heirs from losing their inheritance to taxes or getting their inheritance at a young age.

For many, the solution is converting their traditional IRA to a Roth, where the IRA owner pays the taxes for their heirs. The strategy is generous and may be more tax efficient if the conversion is done during a time in retirement when the IRA owner’s income is lower, and they may be in a lower tax bracket. The average person receiving an IRA inheritance is around 50, typically peak earning years and the worst time to inherit a taxable asset.

Another alternative to replace the stretch IRA is life insurance. Distributions from the IRA can be used to pay premiums on a life insurance policy, with beneficiaries receiving death benefits. The proceeds from the policy are tax-free, although the proceeds are considered part of the policy owner’s estate. With the current federal exemption at $12.06 million for individuals, the state estate tax is the only thing most people will need to worry about.

A Charitable Remainder Trust can also be used to mimic a stretch IRA. A CRT is an irrevocable split-interest trust, providing income to the grantor and designated beneficiaries for up to twenty years or the lifetime of the beneficiaries. Any remaining assets are donated to charity, which must receive at least 10% of the trust’s initial value. If the CRT is named as the IRA beneficiary, the IRA funds are distributed to the CRT upon the owner’s death and the estate gets a charitable estate tax deduction (and not an income tax deduction) for the portion expected to go to the charity. Assets grow within the charitable trust, which pays out a set percentage to beneficiaries each year. The distributions are taxable income for the beneficiaries. There are two types of CRTs: Charitable Remainder Unitrust and a Charitable Remainder Annuity Trust. An estate planning attorney will know which one is best suited for your family. If you would like to read more about managing retirement accounts, please visit our previous posts. 

Reference: Kiplinger (March 3, 2022) “Getting Around the Stretch IRA Block”

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Strategies to Reduce Taxes

Strategies to Reduce Taxes

With numerous bills still being considered by Congress, people are increasingly aware of the need to explore options for tax planning, charitable giving, estate planning and inheritances. Tax sensitive strategies for the near future are on everyone’s mind right now, according to the article “Inheritance, estate planning and charitable giving: 4 strategies to reduce taxes now” from Market Watch. These are the strategies to reduce taxes that you should be aware of.

Offsetting capital gains. Capital gains are the profits made from selling an asset which has appreciated in value since it was first acquired. These gains are taxed, although the tax rates on capital gains are lower than ordinary income taxes if the asset is owned for more than a year. Losses on assets reduce tax liability. This is why investors “harvest” their tax losses, to offset gains. The goal is to sell the depreciated asset and at the same time, to sell an appreciated asset.

Consider Roth IRA conversions. People used to assume they would be in a lower tax bracket upon retirement, providing an advantage for taking money from a traditional IRA or other retirement accounts. Income taxes are due on the withdrawals for traditional IRAs. However, if you retire and receive Social Security, pension income, dividends and interest payments, you may find yourself in the enviable position of having a similar income to when you were working. Good for the income, bad for the tax bite.

Converting an IRA into a Roth IRA is increasingly popular for people in this situation. Taxes must be paid, but they are paid when the funds are moved into a Roth IRA. Once in the Roth IRA account, the converted funds grow tax free and there are no further taxes on withdrawals after the IRA has been open for five years. You must be at least 59½ to do the conversion, and you do not have to do it all at once. However, in many cases, this makes the most sense.

Charitable giving has always been a good tax strategy. In the past, people would simply write a check to the organization they wished to support. Today, there are many different ways to support nonprofits, allowing for better tax advantages.

One of the most popular ways to give today is a DAF—Donor Advised Fund. These are third-party funds created for supporting charity. They work in a few different ways. Let’s say you have sold a business or inherited money and have a significant tax bill coming. By contributing funds to a DAF, you will get a tax break when you put the funds into a DAF. The DAF can hold the funds—they do not have to be contributed to charity, but as long as they are in the DAF account, you receive the tax benefit.

Another way to give to charity is through your IRA’s Required Minimum Distribution (RMD) by giving the minimum amount you are required to take from your IRA every year to the charity. Otherwise, your RMD is taxable as income. If you make a charitable donation using the RMD, you get the tax deduction, and the nonprofit gets a donation.

Giving while living is growing in popularity, as parents and grandparents can have pleasure of watching loved ones benefit from the impact of a gift. A person can give up to $16,000 to any other person every year, with no taxes due on the gift. The money is then out of the estate and the recipient receives the full amount of the gift.

All of these strategies to reduce taxes should be reviewed with your estate planning attorney with an eye to your overall estate plan, to ensure they work seamlessly to achieve your overall goals. If you would like to learn more about tax planning, please visit our previous posts. 

Reference: Market Watch (Feb. 18, 2022) “Inheritance, estate planning and charitable giving: 4 strategies to reduce taxes now”

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Charitable Trusts a Rewarding way to make an Impact

Charitable Trusts a Rewarding way to make an Impact

Charitable trusts can be a critical component of your estate plan and a rewarding way to make an impact for a cause you care deeply about. Charitable trusts can be created to provide a reliable income stream to you and your beneficiaries for a set period of time, says Bankrate’s recent article entitled “What is a charitable trust?”

There are a few kinds of charitable trusts to consider based on your situation and what you may be looking to accomplish.

Charitable lead trust. This is an irrevocable trust that is created to distribute an income stream to a designated charity or nonprofit organization for a set number of years. It can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes, as well as current year income tax deductions when the assets are donated to the trust.

If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 60% of their adjusted gross income (AGI), and any unused deductions can generally be carried over into subsequent tax years. The deduction limit for appreciated securities or other assets is limited to no more than 30% of AGI in the year of the donation.

At the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs, or designated beneficiaries—not the charity.

Charitable remainder trust. This trust is different from a charitable lead trust. It’s an irrevocable trust that’s funded with cash or securities. A CRT gives the donor or other beneficiaries an income stream with the remaining assets in the trust reverting to the charity upon death or the expiration of the trust period. There are two types of CRTs:

  1. A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year, and there are no additional contributions can be made to a CRAT.
  2. A charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated every year. Additional contributions can be made to a CRUT.

Here are the steps when using a CRT:

  1. Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets, such as real estate, to the trust. The amount of the tax deduction is a function of the type of CRT, the term of the trust, the projected annual payments (usually stated as a percentage) and the IRS interest rates that determine the projected growth in the asset that’s in effect at the time.
  2. Receive an income stream for you or your beneficiaries based on how the trust is created. The minimum percentage is 5% based on current IRS rules. Payments can be made monthly, quarterly or annually.
  3. After a designated time or after the death of the last remaining income beneficiary, the remaining assets in the CRT revert to the designated charity or charities.

There are a number of benefits of a charitable trust that make them attractive for estate planning and other purposes. It’s a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to the charity and the donor. The trust also provides upfront income tax benefits to the donor, when the contribution to the trust is made.

Donating highly appreciated assets, such as stocks, ETFs, and mutual funds, to the charitable trust can help avoid paying capital gains taxes that would be due if these assets were sold outright.  Donations to a charitable trust can also help to reduce the value of your estate and reduce estate taxes on larger estates.

However, charitable trusts do have some disadvantages. First, they’re irrevocable, so you can’t undo the trust if your situation changes, and you were to need the money or assets donated to the trust. When you establish and fund the trust, the money’s no longer under your control and the trust can’t be revoked.

Charitable trusts may be a good option if you have a desire a rewarding way to make an impact with some of your assets. Talk with an experienced estate planning attorney about your specific situation. If you would like to learn more about charitable planning, please visit our previous posts. 

Reference: Bankrate (Dec. 14, 2021) “What is a charitable trust?”

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A trust can protect your pet

A Trust can Protect your Pet

One of the goals of estate planning is to care for loved ones, particularly those who depend on us for care after we have passed on. Wills, trusts, life insurance and beneficiary designations are all used to provide support to people—but what about pets? There is something you can do to protect your furry companions. A trust can protect your pet says a recent article from The Sentinel, “Elder Care: Estate planning for your furry friends.”

We love our pets, to the tune of $103.6 billion in expenditures in 2020, including everything from pet food, toys, bedding, veterinary care, grooming, training and even Renaissance style portraits of pets. Scientific studies have proven the emotional and physical advantages pet ownership confers, not to mention the unconditional love pets bring to the household. So why not protect your pets, as well as other family members?

Many people rely on informal agreements with good friends or family members to take care of Fluffy or Spice, if the owner dies or becomes sick to take care of their pet. Here’s the problem: these informal agreements are not binding. Even if you’ve left a certain sum of money to a person in your will and ask it to be used solely for the care and well-being of your pet, it’s not enforceable.

We know all things change. What if your chosen pet caretaker has a child or a new romance with someone with a deathly allergy to pet dander? Or if their pet, who always used to play well during your visits, won’t tolerate your beloved pet as a housemate?

The informal agreement won’t hold the person accountable, and the funds may be spent elsewhere.

A better option is to use a trust to protect your pet. These have been recognized in all fifty states as a lawful way to provide for your animal companion’s needs. A pet trust can be created to provide for your pet during your lifetime, as well as after you have passed, allowing for continuity of care if you become incapacitated and need someone else to have the resources and guidance to care for your pet.

A pet trust is a legal document, prepared by an estate planning attorney and usually includes financial accounts in the name of the trust. Note the pet does not own the trust (animals may not own property), nor do you as the creator of the trust (the grantor). The trust is a legal entity, managed by the trustee.

A few of the things you’ll need to consider before having a pet trust created:

Who is to be the pet’s guardian? Have more than one person in mind, in case the primary pet guardian cannot serve or changes their mind.

If all of your guardians end up unable or unwilling to serve, name a no-kill animal shelter or rescue organization to take your pet. They may require you to plan in advance to cover the cost of caring for your pet. Larger organizations may have a process for a charitable remainder trust (CRT) as part of this type of arrangement.

Give details about pet preferences. If they are AKC registered, use their formal name as well as their regular name. People often fail to use the correct name in legal documents, even for humans, which can lead to legal challenges.

Do you want the same person to serve as trustee, managing funds for the pet, as the guardian? This is a similar decision for naming a guardian for minor children. Sometimes the person who is wonderful with care, is not so skilled at handling finances.

Finally, include instructions about what should happen to the money left after the pet passes. It may be used as a thank you to the person who cared for your beloved companion, or a gift to an animal organization. If you would like to read more about pet trusts, please visit our previous posts. 

Reference: The Sentinel (Jan. 7, 2022) “Elder Care: Estate planning for your furry friends.”

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The Estate of The Union Episode 12 is out now!

The Estate of The Union Episode 12 is out now!

This is the traditional time for giving. Giving to a cause and giving of ourselves.

The newest episode of The Estate of The Union focuses on the topic of charitable giving. Brad chats with Stacey Wedding, an expert on charitable giving, about how it can play a role in your planning strategy and help the people and organizations that have meaning in your life. They discuss both the How and the Why of giving – and Stacy will share tips on becoming a smarter giver too!

Laws concerning charitable giving can change, so be sure your gifting strategies are still appropriate for your estate. Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined to reduce estate taxes. Charitable Remainder Trust can reduce taxes for people who would be making gifts to support meaningful causes. DAFs can be created and funded by individuals or a family and receive a deduction that very same year.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

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The Estate of The Union episode 12-Giving Yourself Away can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen to the new installment of The Estate of The Union podcast. You can also view this podcast on our YouTube page. The Estate of The Union Episode 12 out now. We hope you enjoy it.

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Texas Trust Law/Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

Can you sue a trust directly?

Can You Sue A Trust Directly?

If you have a trust, plan to create one or are the beneficiary of one, you’ll want to understand whether or not a trust can be sued. It’s not a simple yes/no, according to a recent article titled “Estate Planning: Can You Sue a Trust?” from Yahoo! Finance. Can you sue a trust directly? Generally, no, but you can sue the trustee of a trust. You can also sue beneficiaries of a trust.

Understanding when a lawsuit can be brought against a trust should be considered when creating an estate plan, a good reason to work with an experienced estate planning attorney.

A trust is a legal entity used to hold and manage assets on behalf of one or more beneficiaries. A trustee can be a person or business entity responsible for managing the trust and the assets it holds. Trusts can be revocable, meaning the person who created them (the grantor) can make changes, or irrevocable, meaning transfer of assets is permanent (for the most part).

Trusts are used to manage assets while the grantor is living and after they have died. There are many different types of trusts, from a Special Needs Trust (SNT) used to manage assets for a disabled person, or a CRT (Charitable Remainder Trust) used for charitable giving. For instance, a trust generally cannot be sued, but a trustee can.

A trust cannot always protect the grantor or beneficiaries from litigation. If a person has debt and creditors want to be paid, they can sue a revocable trust, as you have not given up much in the way of control using this type of trust—you still directly own the assets in the trust!

Irrevocable trusts provide more protection. Once assets are in the trust, the grantor has given up control of the assets. However, if the trust was created mainly to protect assets from creditors, a court could determine the trust was created fraudulently, and rule against the grantor, leaving all of the assets in the trust vulnerable to creditor lawsuits.

Here’s an example. If you transfer a car into a revocable living trust and cause an accident leading to the death or serious injury of another driver, the driver or their family could sue the trust for damages indirectly, by suing you as the trustee.

Trustees are bound as fiduciaries to manage the trust assets as directed by the grantor and for the best interest of the beneficiaries. The trustee can be sued if someone, typically a beneficiary, believes the trustee is not carrying out their duties. A beneficiary might sue a trustee, if they were supposed to receive a certain amount of money at a specific time, but the trustee has not distributed the funds. This is known as a “breach of fiduciary duty.”

Trustees are also prevented from self-dealing or using trust assets for their own benefit. If a beneficiary believes a trustee is taking money from the trust for their own benefit, they can sue the trustee.

While you can sue a trust directly, it is only under very specific circumstances. A trust can also be “contested,” which is different from suing. Contesting a trust occurs when someone believes the grantor was coerced or subjected to undue influence in creating the trust. It also happens if someone believes the trust or amendments to the trust were the result of elder financial abuse, or if it appears trust documents have been forged or fraudulently altered.

Before a trust can be contested, there needs to be a valid suspicion the trust is somehow in violation of your state’s estate planning laws. You also have to have legal standing to bring a claim. The court may or may not side with you, so there are no guarantees. If you would like to learn more about how trusts works, please visit our previous posts.

Reference: Yahoo! Finance (Nov. 17, 2021) “Estate Planning: Can You Sue a Trust?”

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benefits of a charitable lead trust

Charitable Remainder Trusts can reduce Taxes

Rising prices for investments and real estate is making owners of these assets concerned about paying exorbitant taxes amid discussions of possible changes in the near future. According to a recent article from The Street titled “Retirement Saving and Charitable Remainder Trusts,” having a strategy on hand to prepare for or even avoid these taxes is a wise move. People who are charitably inclined may want to take a closer look at how Charitable Remainder Trusts, or CRTs, can reduce taxes and provide a generous gift to worthy charities.

There are two basic types of CRTs: the Charitable Remainder UniTrust, or CRUT, and the Charitable Remainder Annuity Trust, or CRAT. In both types of trusts, the charity receives the “remainder” of the principal once the income interest ends. Income from the trust is given to a non-charity beneficiary for a certain period of time, or as in many cases, for the entire life of the beneficiary until it’s time for the remainder principal to be donated.

The key difference between the CRAT and the CRUT are how the income payment is calculated. In a CRUT with a 5% payout, the 5% is based on the value of the CRUT each and every year. Obviously that payment amount fluctuates according to the performance of the assets held by the CRUT. In a CRAT, payments are fixed based on in the initial contribution made to set up the account. Your estate planning attorney will be able to recommend the right vehicle for you and your family.

A CRT may be funded with highly appreciated assets because selling within the CRT results in no capital gains to the donor. Any proceeds may be reinvested to generate the needed income, while at the same time potentially growing the remainder asset for charity.

An administrator is hired to evaluate the trust to ensure its compliance, and the administrator’s role is to advise the trustee on the amount of the distribution annually to the beneficiary.

Since the charity is the remainder beneficiary, the grantor is not able to deduct the entire amount of the contribution to the CRT. The deduction is determined by the income payments selected and the terms of the CRT. There are software programs used to calculate the approximate deduction based on the input. The higher the income payment, the lower the deduction.

Note that if you are giving highly appreciated long-term capital gains assets, only 30% of the adjusted gross income can be given. The rest may be carried forward for five years. This should be considered when determining how much to contribute to the CRT.

The choice of CRTs lets you design a desired income stream from the trust. The taxability of the CRT is based on the types of assets used. There are four tiers, as defined by the IRS: ordinary income (which includes current year and accumulated income) and qualified dividends; capital gains; other tax-exempt income; and return of principal.

To solve the problem of choosing a charity, many prefer to use a Donor Advised Fund as a beneficiary. The DAF can be treated like a charity for tax purposes. The DAF lets you control how the account is funded and the timing of distribution of assets. The charities do not need to be named when the CRT is first created.

The Charitable Remainder Trust can reduce taxes for people who would be making gifts to support meaningful causes. Your estate planning attorney will be able to help you set up a CRT to work in tandem with the rest of your estate plan.

If you would like to learn more about Charitable Remainder Trusts and how they can benefit your planning, please visit our previous posts. 

Reference: The Street (June 25, 2021) “Retirement Saving and Charitable Remainder Trusts”

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charitable options to reduce estate taxes

Charitable options to Reduce Estate Taxes

Increasing tax changes for the wealthy are coming, and motivation to find ways to protect the wealth is getting increased attention, according to a recent article from CNBC entitled “Here’s how to reduce exposure to tax increases with charitable contributions.” Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined to reduce estate taxes. The CRT is complicated, requiring estate planning attorneys to create them and accountants to maintain them. The DAF is simpler, less expensive and is growing in popularity.

Both enable income tax deductions, in the current year or carried forward for five years, on cash contributions of up to 60% of the donors’ AGI and up to 30% of AGI on contributed assets. These contributions also reduce the size of taxable estates.

CRTs funnel asset income into a tax-advantaged cash stream that goes to the donor or another designated non-charitable beneficiary. The income stream flows for a set term or, if desired, for the lifetime of the non-charitable beneficiary. The trusts must be designed, so that at the end of the term, at least 10% of the funds remain to be donated to a charity, which must be designated at the outset.

No tax is due on proceeds from the sale of trust assets, until the cash makes its way to the non-charitable beneficiary. When assets are held by individuals, their sale creates capital gains tax in the year they are sold.

CRT donors can fund the trusts with highly appreciated assets, then manage them for optimal returns while minimizing tax exposure by adjusting the income stream to spread the tax burden over an extended period of time. If capital gains tax rates are raised by Congress, this would be even better for high earners.

DAFs do not allow dispersals to non-charitable beneficiaries. All gains must ultimately be donated to charity. However, the DAF provides advantages. They are easy to create and can be set up with most large financial service companies. Their cost is lower than CRTs, which have recurring fees for handling required IRS filings and trust management. Charges from financial institutions typically range from 0.1% to 1% annually, depending upon the size, and a custodial fee for holding the account.

DAFs can be created and funded by individuals or a family and receive a deduction that very same year. There is no hurry to name the charitable beneficiaries or direct donations. With a CRT, donors must name a charitable beneficiary when the trust is created. These elections are difficult to change in the future, since the CRT is an irrevocable trust. The DAF allows ongoing review of giving goals.

Funding a DAF can be done with as little as $5,000. The DAF contribution can include shares of privately owned businesses, collectibles, even cryptocurrency, as long as the valuation methods used for the assets meet IRS rules. Donors can get tax deductions without having to use cash, since a wide range of assets may be used.

The DAF is a good way for less wealthy individuals and families to qualify for itemizing tax deductions, rather than taking the standard deduction. DAF donations are deductible the year they are made, so filers may consolidate what may be normally two years’ worth of donations into a single year for tax purposes. This is a way of meeting the IRS threshold to qualify for itemizing deductions.

Both charitable options are effective ways to reduce estate taxes. Which of these two works best depends upon your individual situation. With your estate planning attorney, you’ll want to determine how much of your wealth would benefit from this type of protection and how it would work with your overall estate plan.

If you would like to learn more about charitable contributions, please visit our previous posts. 

Reference: CNBC (April 20, 201) “Here’s how to reduce exposure to tax increases with charitable contributions.”

 

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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