ADDITIONAL TRUSTS FOR LARGER ESTATE PLANS
In an effort to avoid additional estate taxes, trusts other than the individual or family trusts are utilized. Below are some examples of these types of trusts and brief explanations of each.
CHARITABLE REMAINDER TRUSTS: A Charitable Remainder Trust (CRT)
can be a very useful tool for people who want a current income tax deduction but do not want to give up all benefit of the assets donated to the trust. Any income from the property that you donate will be paid to you for your life and then to your spouse for their life. When both you and your spouse die, the charity will then get the property that you gifted to the trust. By using this form of trust, the donor can dispose of the property without paying capital gains tax or gift or estate tax while receiving income from the trust for the rest of his/her life.
Charitable Remainder Annuity Trust - (CRAT) A CRAT provides that you, or someone else, will be given a pre-selected percentage of the trust's value. The percentage is calculated based on the value of the property transferred to the trust. Once you establish the trust you cannot transfer any more property into it.
Charitable Remainder Unitrust - (CRUT) A CRUT provides that those entitled to the income will be paid a variable percentage of the trust's value. The minimum amount must be 5 percent. Once you establish this trust, you may make additional contributions if certain conditions are met.
EXAMPLE: A married couple owns stock worth $450,000, which has a tax basis of $50,000. If they sold the stock they would have to pay income tax on $400,000 capital gain.
Instead, the couple transfers the stock to a CRT. The couple has a lifetime income from the CRT and a qualified charity receives the remainder. Due to the gift tax charitable deduction there are no gift tax consequences resulting from the transfer as there would be if the couple, for example, gave the stock to a child. Note that the child or any other donee would acquire the couple's low basis in the stock if he/she received it as a gift. Additionally, giving stock valued at $450,000 to one individual would represent a taxable gift of $430,000 (utilizing $12,000 tax exemption). Under the terms of the CRT, the couple receives a specified yearly percentage of the trust property's value as income for up to twenty (20) years or the rest of their lives. The CRT can sell the stock with no capital gains tax consequences and invest the sale proceeds to generate the couple's life income. The couple can use the charitable deduction from the donation of the stock to the trust to reduce their income tax for up to six years. At the second spouse's death the remaining trust principal passes to the charity. The stock generates no estate tax since it had been removed from the couple's estate during life (without gift taxes).
In an effort to avoid additional estate taxes, trusts other than the individual or family trusts are utilized. Below are some examples of these types of trusts and brief explanations of each.
CHARITABLE REMAINDER TRUSTS: A Charitable Remainder Trust (CRT)
can be a very useful tool for people who want a current income tax deduction but do not want to give up all benefit of the assets donated to the trust. Any income from the property that you donate will be paid to you for your life and then to your spouse for their life. When both you and your spouse die, the charity will then get the property that you gifted to the trust. By using this form of trust, the donor can dispose of the property without paying capital gains tax or gift or estate tax while receiving income from the trust for the rest of his/her life.
Charitable Remainder Annuity Trust - (CRAT) A CRAT provides that you, or someone else, will be given a pre-selected percentage of the trust's value. The percentage is calculated based on the value of the property transferred to the trust. Once you establish the trust you cannot transfer any more property into it.
Charitable Remainder Unitrust - (CRUT) A CRUT provides that those entitled to the income will be paid a variable percentage of the trust's value. The minimum amount must be 5 percent. Once you establish this trust, you may make additional contributions if certain conditions are met.
EXAMPLE: A married couple owns stock worth $450,000, which has a tax basis of $50,000. If they sold the stock they would have to pay income tax on $400,000 capital gain.
Instead, the couple transfers the stock to a CRT. The couple has a lifetime income from the CRT and a qualified charity receives the remainder. Due to the gift tax charitable deduction there are no gift tax consequences resulting from the transfer as there would be if the couple, for example, gave the stock to a child. Note that the child or any other donee would acquire the couple's low basis in the stock if he/she received it as a gift. Additionally, giving stock valued at $450,000 to one individual would represent a taxable gift of $430,000 (utilizing $12,000 tax exemption). Under the terms of the CRT, the couple receives a specified yearly percentage of the trust property's value as income for up to twenty (20) years or the rest of their lives. The CRT can sell the stock with no capital gains tax consequences and invest the sale proceeds to generate the couple's life income. The couple can use the charitable deduction from the donation of the stock to the trust to reduce their income tax for up to six years. At the second spouse's death the remaining trust principal passes to the charity. The stock generates no estate tax since it had been removed from the couple's estate during life (without gift taxes).
Giving the stock to the CRT makes it impossible for the couple's death beneficiaries (ie children) to receive it. The death beneficiaries, however, can be benefitted in other ways. For example, the couple could purchase life insurance policy and place it in an irrevocable life insurance trust of which the children would be beneficiaries. The insurance proceeds would not be subject to tax or income tax.
It is possible for the CRT's remainder beneficiary to be an institution or foundation the couple members themselves create for a cause they consider worthy, as long as the institution meets the requirements of the IRS for being a qualified charity. The couples children could be the directors of this institution and receive a salary from it.
Grantor Retained Annuity Trust and Grantor Retained Unitrusts (GRAT or GRUT) GRAT and GRUTs are forms of trust whereby the trust creator (grantor) gifts the remainder interest in the trust property to a donee (such as a child) after receiving income from it for a fixed term of years. The value of the gift is reduced by the value of the grantor's retained income interest as determine by IRS tables. If the grantor survives the GRAT's and GRUT's term, the value of the remaining property for gift tax purposes may be significantly less than its actual value.
A Qualified Personal Residence Trust (QPRT) A QPRT is a form of Grantor Retained
Income Trust (GRIT) for a residence owned by the grantor. The remainder interest for gift tax purposes may be considerably less than the actual value of the residence. This could be an effective method of gifting a residence such as a vacation home with a reduced gift tax value after retaining an ownership interest for a term of years.
CHARITABLE LEADS TRUST: The trust is similar to the Charitable Remainder
Trust but works in reverse. In this type of trust, the charity will receive the income before the beneficiaries that you have designated. One of the main reasons for setting up this type of trust is to substantially reduce the gift and estate taxes.
This trust is appropriate for you if: (1) you have a charitable intent; (2) you want to increase your family's net worth; (3) you want to reduce gift and estate taxes; and (4) you don't need any additional income.
Example: You establish a charitable trust and put $50,000 into the trust. When you setup the trust you determined that the trust should last for 10 years. The charity that you selected will receive annual payments for 10 years. The trust earns $5,000 per year which is given to the charity. Once the term expires, your beneficiaries will receive the remaining assets. The benefit to your beneficiaries lies in the fact that the value of the gift is reduced by the value of the income paid to the charity over the 10 years ($50,000). The net result is that the beneficiaries will receive the $50,000 without incurring any gift tax.
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