charitable planned giving

Debra Scott, JD, MPH

The Scott Practice, LLC

Charitable Trusts

Charitable Split Interest Trusts

Charitable Lead Trusts

Charitable Remainder Trusts of text goes

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Charitable Planning Considerations line of

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The Scott Practice, LLC Copyright 2014 All rights reserved

Not Considered Legal Advice

Presentation Agenda



WHAT IS A CHARITABLE SPLIT-

INTEREST TRUST?

Irrevocable trust arrangement funded by a donor

where the interests in the trust are divided

between at least one non-charity beneficiary and

a qualifying charity.

WHAT IS A CHARITABLE SPLIT-

INTEREST TRUST?

Charitable Lead Trust - is an irrevocable trust arrangement

funded by a donor which provides periodic distributions to a

charity, followed by a final distribution to a non-charitable

beneficiary.

Charitable Remainder Trust - is an irrevocable trust

arrangement funded by a donor which provides periodic

distributions to a non-charitable beneficiary, followed by a

final distribution to a charity. The Scott Practice, LLC Copyright 2014 All rights reserved


CHARITABLE LEAD TRUST

A Charitable Lead Trust (CLT) allows a donor to provide a significant

contribution to charity with the potential to reduce or eliminate gift or

estate taxation if properly structured.

A lead trust makes distributions to charity each year (the “lead interest”)

and then upon termination distributes its remaining assets to individuals.

As such, a charitable lead trust can be an excellent tool for a donor with

significant assets to make a large charitable gift, and also benefit his or

her descendants.





CHARITABLE LEAD TRUST

Currently, CLTs have grown in popularity among estate planners because

of the Applicable Federal Rate (AFR) continues to be at a historical low 2

percent.

A low AFR means a higher gift or estate tax charitable deduction, which

translates into the potential for a wealthy donor to ultimately pass more

assets to descendants free of gift and estate taxation.

Also, CLTs have no minimum or maximum payout requirements, unlike

charitable remainder trust which require a five percent minimum and fifty

percent maximum payout.

Grantor versus Non-Grantor CLTs

Creates present

interest to

charity and a

remainder

interest to the

donor.

Creates present

interest to

charity and a

remainder

interest to

donor’s

beneficiary

Grantor CLT Non-Grantor CLT

The

distinction

between the

two forms of

trust is

critical.



Grantor versus Non-Grantor

CLTsA CLT is not considered a tax-exempt entity for tax

purposes. The taxability of a CLT is based on

whether the trust is a grantor or non-grantor trust.

If the provisions of the trust qualifies the trust as a

“grantor trust” for tax purposes, then the donor will

be taxed on all earned trust taxable income during

the period trust disbursements are made to the

named charity.




CLTsThe donor is entitled to an income tax deduction

only at the time of funding.

No income tax deduction is allowed for the

annual payments from the trust to the named

charity.

As a result, the income tax benefit the donor

received at the time of funding may be eroded

over time because of annual recognition of income

taxes.




CLTsOn the other hand, an income tax charitable deduction under

section 642( c)(1) is available each year for non-grantor CLT.

Hence, any taxable income earned by the trust can be offset

by the charitable deduction available for the annual amount

distributed to charity.

This can result in the lead trust owning no income tax. A

trade off is that the donor does not receive an income tax

charitable deduction at the time of funding or anytime

thereafter. However, because it is a non-grantor trust, the

donor does not report the trust’s earned income.

Two Types of CLTs

an annuity

payment is

distributed to

charity,

established at the

time of trust

funding.

the payment

amount is a

predetermined

percentage of the

trust’s value and

is revalued each

year.

Charitable Lead Annuity

TrustCharitable Lead Unitrust

The

distinction

between the

two forms of

trust is

critical.



Two Types of CLTs

Both trusts are irrevocable – thus upon funding the trust, the

grantor removes assets funding the trust from his or her

gross estate for gift and estate tax purposes.

Again, there is a significant planning distinction between the

type of payment charity receives – annuity versus unitrust.



Two Types of CLTs

How Taxable Gift Transfer Calculated:

An inter vivos CLT earns a gift tax deduction for the

present value of the payments to the charity. The

taxable gift from the donor is equal to the difference

between the present value (of the annuity/unitrust

payments) and the funding amount of the trust.

Funding amount – present value of annuity/unitrust

(gift tax charitable deduction) = Taxable Gift



Two Types of CLTs

The goal in structuring the CLT is to avoid to

the greatest extent allowable gift taxes.

Thus, we want the present value of the

annuity payment to be as large as possible so

that we potentially can move the greatest

amount to the donor’s beneficiaries tax free.



Two Types of CLTs

Only a CRAT can be structured so that the present

value of the annuity payments to the charity is equal to

the property funding the CLAT.

The annuity payment are precisely calculated so that

the present value of such payments exactly equals the

value of the assets originally funding the trust.

This is referred to as a 100 percent deduction CLAT or

a “zero-out” CLAT.



Two Types of CLTs

Gift Amount Gift Date and AFR Term of Years Payment to Charity Initial Percentage

$2,000,000 7/17/2014

AFR 2.2% 20 Annual 6.24%

(A)Annual Annuity Amount $124,700

(B)IRS Factor Pub 1457 Table B x Feq Adj 1x 16.0402

(C ) Payout Feq Adj 16.0402

(D)Present Value of Annuity (C )x(A) ~ $2,000,000

(E)Initial Funding Amount $2,000,000

(F) Taxable Gift (E)-(D) $0



Two Types of CLTs

In a low interest rate environment, a CLAT is an

excellent vehicle for charitable gifts for the right donor.

However, in a high interest rate environment, less or

possibly nothing may ultimately pass to non-charitable

beneficiaries if a CLAT is structured.

CLUTs are generally not sensitivity to interest rates so

they are used most often in a high interest rate

environment.



Two Types of CLTs

Also, if the donor has remaining lifetime gift

tax exemption, then the CLAT can be

structured to receive a less than 100%

charitable gift tax deduction.

This will result in more funds within the CLAT,

with a greater probability of assets remaining

for non-charitable beneficiaries on termination

of the CLAT.

Step CLATs & Shark Fin Trusts

amount of the

annuity

uniformly

escalates during

the annuity

term.

trust makes

small payments

each year to the

charity and then

a final balloon

payment

Step CLATs Shark Fin Trust

These two

trusts are

considered

more

aggressive

charitable

planning



Step CLATs & Shark Fin

TrustsThe standard CLAT is a straight-line annuity

payment, where the amount of the annuity does

not change during the annuity term.

The disadvantage of a straight annuity is that

each year the rate of return on trust assets

generally must outperform the annuity amount in

order for there to be a healthy amount remaining

for beneficiaries.




TrustsHowever, if the charity receives a lower amount at the

beginning of the trust term with escalating payments,

there is a higher earning potential for the trust overall.

The Internal Revenue Service (IRS) has provided

some guidance on structuring a CLAT such that the

payments to charity begin small but increase each year

by a certain percentage.




TrustsUnder Private Letter Ruling 201216045 found at

http://www.irs.gov/pub/irs-wd/1216045.pdf - the IRS allowed

a variable ascending annuity payments and stated that such

payments “satisfied the requirements of Section 2055(e)(2)

for a guaranteed annuity interest.”

Under PLR 201216045, the testator created a 10-year

testamentary lead annuity trust with annuity payments to

charity that increased twenty percent per year.

http://www.irs.gov/pub/irs-wd/1216045.pdf




TrustsThe idea of the Shark Fin to defer

distributions for the greatest period possible

in order to maximize performance of the trust.

A shark fin lead trust generally is known to

outperform standard straight annuity CLATs.



Charitable Remainder Trusts

A charitable remainder trust (CRT) is essentially the

opposite of a charitable lead trust (CLT) in that the

annuity or unitrust payments are first made to a non-

charitable beneficiary with the remainder interest

distributed to charity.



Charitable Remainder Trusts However, unlike a CLT, there is a minimum payout requirement

of 5 percent with respect to the annuity or unitrust payments and

a maximum requirement of 50%.

There is also a 20 year term limitation for CRTs, but there is no

such requirement for CLTs.

Similar to CLTs, the annual payout to the non-charity beneficiary

is either in the form of an annuity payment or unitrust payment.



CRATs

CRAT- a trust arrangement where a fixed sum (not less

than 5 percent of the initial trust value) is paid to one or

more persons at least annually for a term of years not

to exceed twenty years or for the life or lives of the

non-charity beneficiary or beneficiaries.

A key distinction with respect to a CRAT is that the

annuity percentage is fixed and with level payments

exclusive of trust performance. Also, additional

contributions to the CRAT is not permitted.



CRUTs

CRUT – a trust arrangement where trust distributions

are made on a periodic basis not less than annually

which equal at least 5 percent of the net fair market

value of the trust assets, valued annually. Additional

contributions to the CRUT are permitted.

Under a standard CRUT, when income and gain is not

sufficient to meet the required unitrust payment, the

trustee is required to distribute principal to make up the

difference.



Net Income Option

A CRUT can be structured as a Net Income

CRUT. Under this type of arrangement, the

trustee can pay the lesser of the full unitrust

amount and trust income.

What is essential here is how the trust and

state law define trust income.



Net Income Option

The IRS has stated under Reg. Section

1.643(b)-1, that “any trust which departs

fundamentally from concepts of local law in

the determination of what constitutes income

are not recognized for federal tax purposes.”

Therefore, it is important that the trust

document’s terminology regarding trust

income is consistent with state law.



Net Income Unitrust with

Make-up A step beyond the Net Income Unitrust is the NIMCRAT.

Under this arrangement, the trustee is directed to make-up

past deficiencies from prior years by distributing the excess

income earned in the current year.

Thus the trustee pays trust income in excess of that year’s

full unitrust amount if the aggregate of amounts paid in prior

years is less than the aggregate unitrust amount in prior

years.

Unitrust Amount in Prior Year – Amount Paid in Prior Year =

Difference can be Made Up



FLIP Unitrust

IRS regulations allow the trust instrument to pride a

one-time conversion from one of the income

exception methods to the standard CRUT method

upon a triggering event such as the sale of an illiquid

or unmarketable asset.

Unmarketable assets are defined as assets other

than cash, cash equivalents, or marketable

securities.



Planning Considerations

Because CRAT requires a fixed distribution with no

ability to make additional contributions to the trust, it is

less flexible than a CRUT.

If the CRAT is funded with assets with wide

fluctuations in value, it may be difficult to recover for a

loss of principal under a CRAT because payments are

fixed, potentially creating a higher reduction in

principal.




The annuity structure is generally best for low

risk assets and for persons with a short

investment horizon.

Unitrust are best if the assets used to fund the

trust are illiquid non-income producing assets

because the trust can be structured as a Net

Income Only trust.




NIMCRUT- the trustee is not obligated to make

distributions when trust cash flow is insufficient to

meet the unitrust payout.

If the return on investment outperforms the unitrust

payout from year to year, then the trust principal has

time to appreciate and can potentially payout larger

unitrust amounts to the non-charity beneficiary in

later years.



Thank you

For Questions Please

Contact

Debra Scott, JD, MPH

The Scott Practice, LLC

[email protected]

mailto:[email protected]

charitable planned giving

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