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Charitable Lead Trusts:  The Icing on the Cake

 

Having Your Cake and Eating it Too:

Providing For Family Members

While Achieving Gift Giving Goals:

Using Charitable Lead Trusts

Written by: Steven J. Fromm, J.D., LL.M. (Taxation)

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. There are various methods available such as direct gifts to charities, creation and funding of private foundations, giving to pooled income funds and charitable remainder and lead trusts.  This article will provide a brief overview and explore some of the basics concerning the charitable lead annuity trust and how it facilitates a taxpayer's charitable goals while preserving and growing assets for beneficiaries.

Fixed Payments to Charity

When you set up a charitable lead annuity trust (sometimes referred to as a CLAT, the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children.

Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.

Individuals who can be used as the measuring lives for annual payouts would be restricted to the donor's life, the life of the donor's spouse, or a lineal ancestor of the beneficiaries. Some people have tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, such as those who were seriously ill and were expected to die prematurely, as the measuring lives.  But the IRS does not allow this and limits measuring lives to such spouse or lineal ancestors.

Tax Benefits

Understand that the estate or gift tax is based on the actuarial value of the remainder interest to the non-charitable beneficiaries when the CLAT is created and not when the assets pass to your beneficiaries.  So when the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. 

In contrast, if the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve - and more importantly - grow them.

Generally, income paid to the charity is subject to tax at the trust level.  However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner. Even with this limitation, the benefits are usually enough to justify this strategy. This is especially the case in our current 2012 low interest environment

Timing the Creation of a CLAT

CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust as this trust is irrevocable.

A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family.

Documentation Warning

The IRS has some very detailed rules concerning the drafting of these documents.  In addition, state rules concerning trust provisions need to be ascertained and complied with when drafting charitable trusts.  Obviously these documents require experience and knowledge of these operative rules.

Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you. 

Copyright © 2012 - Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.  

Mike Massa, Owner, Klatzkin & Company, LLP, a CPA firm that worked with Steven J. Fromm, November 25, 2008:  "I have always found Steve to be very responsive, accurate and creative in legal matters presented to him. He demonstrates a good business sense. We have collaborated on several highly technical issues over the years. I look forward to our continuing relationship.”


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
 
 
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