Charitable trusts originated in England early in the 17th century and centered on the religious activities of the noble class. They were another creative method of retaining control over family wealth for the benefit of the living as much as they were about redistribution to philanthropic causes.
All about Giving… and Managing Tax Liability
Have you wondered if a charitable trust might work for you? If the current market value of your assets exceeds $10,000,000 then a charitable trust might just fit. When you create, execute and fund a charitable trust, you can suspend tax liability while maintaining your ability to receive income off the principal for a set period of time. And, like other trusts, the assets in the charitable trust are safe from future creditor claims.
How Charitable Trusts Work
For the creator of a charitable trusts there are no capital gains tax, no gift tax, and no estate tax. This is because the assets are removed from their estate and personal tax return.
Over time, the donor can either:
- Receive a tax deduction for the gift to the trust (this deduction is based on the appreciated fair market value of the assets donated minus the total income stream that it produces).
- Or, receive an income stream for a specified number of years or until the death of named beneficiaries who can be up to two generations in advance of the creator (namely grandchildren.).
Charitable Annuity Trust
A couple that has built a prosperous business over the decades wants to retire. If they do a straight sale, there’s a large tax bill. In the same manner, a single person with significant tech stock gains may be facing a significant tax challenge. The alternative for both is to form an annuity trust.
The donor to an annuity trust receives a fixed dollar amount of at least 5% annually of the initial fair market value. This percentage is based on a single funding of the annuity, no additional contributions can be made to the annuity after it is established. One or more beneficiaries can be designated to receive 5% annual income for life or for a set period of time. Upon death of the beneficiaries or the expiration of the set period of time, the ‘remainder’ interest transfers to a charitable organization.
Example of Charitable Annuity Trust Structure
$3,000,000 cost basis of investment
$14,000,000 current market value
$11,000,000 gain (non-taxable gain when asset is held in trust)
$550,000 annual income ($11,000 gain now delivering 5% annual income)
$5,500,000 for 10 years income
$5,500,000 reversionary gift to charity
(tax deduction is based upon the present value of reversionary interest per Treasury tables)
Charitable Unit Trust (aka NIMCRUT)
The unit trust is similar to the charitable annuity trust with the following exception: the 5% minimum distribution is based upon the value of the assets each year – which may increase by virtue of accruing compound interest or appreciation.
The donor may add more assets to a unit trust over time. Alternatively, the trust agreement can specify minimum distribution plus any additional income (but not capital gains) is paid to beneficiaries each year. Ultimately the asset reverts to charity upon death of the last beneficiary.
Charitable Lead Trust
A charitable lead trust works in the reverse way of a charitable annuity or unit trust. Your charity of choice gets the present income stream, and beneficiary gets the property after demise of the grantor (creator of or donor to the trust) or a specified period of time.
This is useful in estate planning where income producing property is managed by the charity for minors and/or incompetents unable to handle administration of a large estate. It’s often used to fund a specific charity project in which the grantor has a special interest, e.g., a building fund. Afterwards, the asset reverts to heirs when they are capable of managing it themselves or when they are nearing retirement.
Tax write-off is based upon the present value of the income annuity to the charity per treasury tables. The estate tax is the discounted future value of the property to the heirs.
Charitable Grantor Retained Income Trust
The grantor retained income trust is used for estate transfer of a personal residence or family home. Grantor transfers the property to the trust while retaining the right to use it for life. Beneficiary of this trust receives the property after grantor has died. Value of the gift from grantor to beneficiary is calculated as the present value discounted by the actuarial life of the grantor using Treasury tables. Gift taxes are paid on this amount in the year of the transfer into trust if exceeds lifetime exclusion, approximately $5.43m in 2015.
Tap into the Unique Power of Trusts
To tap into the unique power of trusts for ensuring a secure financial future you need an expert, and we are the experts across a broad range of infinitely valuable private trusts. TrustArte is here to personally assist you. We’re here to educate you. We’re here to give you the financial privacy you not only deserve, but need.
Our Open Philosophy Trust Arte will openly engage with other professional advisors such as tax specialists and accountants to develop the most effective solutions for our clients. Should their services be of value to you, our trust professionals will work with your other advisors. This “open architecture” philosophy, which is reflected throughout our organization, allows us to build closer relationships with our clients and offer them the best solutions.