Charitable giving is an essential part of many estate plans. If offers an opportunity for the affluent to leave a mark in the world beyond their own homes and families. And our estate planning laws are set up to encourage such things, offering financial incentives for people to donate sizable portions of their estates to charitable organizations.
By far the most popular vehicle for charitable giving is the charitable remainder unitrust. According to IRS statistics collected by the National Philanthropic Trust, there were 93,828 charitable remainder unitrusts in the U.S. as of 2011, holding a collective $86.9 billion in assets.
That adds up to approximately 80 percent of all the charitable trust vehicles. So clients — and even some estate planners — can be forgiven for thinking that is their only real option for setting up a charitable giving plan.
But it’s not perfect for everyone. Some clients would be better off with other options. Here are some considerations that may lead clients to consider alternatives to the charitable remainder unitrust:
The client wants consistent payouts. The significant difference between a charitable remainder annuity trust and a unitrust is that the former guarantees equal payouts for each year (or other designated term). Under a charitable remainder annuity trust, the payments are designated to be at least five percent of the trust’s initial value.
A unitrust’s payments must be equal to at least five percent of the annual value of the trust’s property, which fluctuates in value. Annuity trusts aren’t nearly as popular as the unitrusts — there were 15,862 annuity trusts in 2011 — about 17 percent as many as there were unitrusts.
The client needs to maximize the immediate tax deduction. A charitable lead trust might be the best way to minimize immediate income taxes. Under a charitable lead trust, the donor receives an immediate federal income tax deduction when he makes the gift, equal to the present value of the future income stream.
With a charitable remainder trust, the deduction is based upon a complex calculation of the estimated present value of the remainder interest that will ultimately go to the charity. The donor is taxed each year, however, on the value of the income interest that is payable to the charity. There is a nice tax benefit to charitable remainder trusts, though: The client can avoid capital gains taxes on the sale of the assets in the trust. That’s especially beneficial if the trust contains an asset that has appreciated greatly in value, like Apple stock or a vacation home bought in 1974.
The client wants the donation to the charitable institution to start now. With a charitable lead trust, the client gifts the assets directly to a charitable trust that then makes annual, quarterly or monthly payments to a charity or charities of their choice, either for life or for a specified number of years. When the trust expires, the remaining principal of the trust can be distributed to the client’s family. With a remainder trust, the charity doesn’t receive anything until the end of the trust’s term.
The client doesn’t want to bother with investment decisions. A type of charitable trust, the pooled income fund, is a charitable trust established and maintained by a nonprofit organization. Donors to a pooled income fund may be eligible to take an immediate partial tax deduction, based on their life expectancy and the anticipated income stream, but the income they receive from the fund is subject to income tax. The client will avoid capital gains tax on the donated assets, though. After the death of the beneficiaries of the fund, the client can designate which charitable institutions are to receive the balance of the assets.
The client wants to have assets available for children or grandchildren. Generation-skipping planning has been one of the prime attractions of charitable lead trusts. Since the money goes first to the charitable organization, what’s left upon the grantor’s death can be designated to go to children or grandchildren.
The client doesn’t want to lose control of assets. Charitable trusts require that that you give up legal control of your property, and charitable trusts are irrevocable. If the client wants to keep control of all the assets, making periodic direct gifts to charities might be the way to go.
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