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Two Popular Charitable Trusts for You to Consider

A couple of charitable trusts are very popular with people making significant gifts to charity: the charitable lead annuity trust (CLAT) and the charitable remainder unitrust (CRUT). They each allow income, gift, and estate tax charitable deductions for a trust with both charitable and noncharitable beneficiaries. A CLAT leads off with a stream of annuity payments for the charity, while the CRUT provides a remainder interest for the charity when the trust ends.

Charitable lead annuity trust (CLAT)

With a charitable lead annuity trust, the charity generally receives the right to a fixed annuity amount each year (or at more frequent intervals). The annuity payments are generally made for a fixed term of years, or for one or more lives. After the specified term, the remaining trust property passes to you or another noncharitable beneficiary you designate.

An income tax charitable deduction is available to you at the time you create and fund the CLAT if the trust is structured so that you (as the grantor or creator of the trust) will be taxed on trust income each year. The up-front charitable deduction can be especially useful if you have a large amount of taxable income in the year the trust is created. If you take the up-front charitable deduction and cease to be taxed on trust income during the trust term (e.g., you die before the trust term ends), you may have to recapture part of the charitable deduction by adding the recaptured amount to your taxable income. For years in which you are not taxable on trust income, the trust may generally take charitable deductions against trust taxable income for distributions to charity.

The value of the up-front charitable deduction is based on the amount of the annuity going to the charity each year, how long the payments will be made to charity, and the appropriate interest rate used by the IRS to value the future payments.

A gift or estate tax charitable deduction is also available for the present value of the annuity interest the charity receives. Any remainder interest passing to a noncharitable beneficiary will be subject to gift or estate tax when the CLAT is created and will not qualify for the annual gift tax exclusion. The value of the remainder interest will be discounted to reflect that it will be received in the future. If the remainder interest passes to a person two or more generations younger than you, the generation-skipping transfer (GST) tax may apply.

Charitable remainder unitrust (CRUT)

With a charitable remainder unitrust, the noncharitable beneficiary receives a payment (the unitrust amount) from the trust property every year (or at more frequent intervals), which is based on the value of the trust assets each year. The unitrust payments are generally made for a fixed term of years, or for one or more lives. At the end of the trust term, the remaining property passes to the charity.

One CRUT variation permits payment of the lower of the unitrust amount or trust income for a period of years. Another CRUT variation then allows makeup distributions of the forgone unitrust payments at a later time. These variations may allow payments to be delayed until a later time, when the trust has income or the noncharitable beneficiary is in a lower income tax bracket.

An income tax, and gift or estate tax, charitable deduction is available to you at the time you fund the CRUT. The value of the up-front charitable deduction is based on the unitrust payout rate, how long the charity will have to wait to receive the remainder interest, and the appropriate interest rate used by the IRS to value the future interest. Any unitrust interest passing to a noncharitable beneficiary may be subject to gift or estate tax, as well as GST tax, when the CRUT is funded. The unitrust interest may qualify for the annual exclusion for purposes of the gift tax, but not for GST tax.

A CRUT is generally not subject to income tax. Instead, CRUT beneficiaries are taxable on unitrust payments as received. Distributions are treated as drawing out taxable income, capital gain, tax-exempt income, and trust corpus from the trust, in that order. In other words, distributions are generally treated as drawing out amounts taxable worst first. However, one advantage of a CRUT is that a CRUT can sell property and the beneficiary will not be taxed on capital gain from the sale until the beneficiary receives a distribution that is treated as capital gain.

Charitable deduction limits

The amount of your income tax charitable deductions are generally limited to 50% (or 30% or 20%) of your adjusted gross income (AGI), depending on the type of charity and the property transferred to the charity or charitable trust. Charitable deductions disallowed because of the percentage of AGI limits may be carried over and taken during the next five years, subject to the percentage of AGI limits in those years. Gift and estate tax charitable deductions are not subject to any percentage of AGI limit.

Trusts with both charitable and noncharitable beneficiaries must follow special rules if you wish to receive income, gift, and estate tax charitable deductions for the amounts going to charity. Consult a tax or estate planning attorney familiar with charitable trusts.



IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.