Effective Estate Planning Options to Protect Your Legacy
There are many reasons to incorporate charitable trusts into your estate plan. You may be interested in the tax reduction benefits, you may wish to leave behind a legacy, you may wish to fund your own Private Family Foundation to promote social or political goals, or all of the above. Charitable trusts can be structured in an endless number of ways to achieve all of your goals. The international estate planning team at Castro & Co. can explain the options available and how these options can be integrated into your overall estate plan.
If you’re interested in learning more about charitable trusts, schedule a free confidential consultation with one of our international estate planning attorneys by clicking here or calling (888) 595-5088.
What Type of Charitable Trusts Are Available?
Two of the most common types of charitable trusts are Charitable Lead Trusts and Charitable Remainder Trusts. These two categories are further broken down into more specific categories depending on how the distributions from the trusts are structured.
Charitable Remainder Trusts (CRT) are trusts that give the beneficiary (yourself or others) a stream of income for a set period of time with the remainder going either to a charity of your choosing or to a private family foundation controlled by you or your family, which our firm can establish.
If you have an upcoming capital gains transaction, the two primary tax benefits are: (1) if you transfer the capital asset to the charitable remainder trust before the sale of that asset, there is no immediate capital gains tax; instead, it is taxed over a longer period of time as the trust makes actual distributions to you, which effectively converts an outright sale into an installment sale allowing you to spread the gain and resulting tax over a longer period of time thereby reducing the overall lifetime effective income tax rate on the gain; and (2) you get an upfront charitable deduction for the value of the remainder interest even if it goes to a private family foundation you control thereby allowing you to host charitable fundraising galas and cocktail parties or even setting up a structure that allows you to promote your social or political goals through educational outreach programs. You will be amazed at the solutions our firm offers, so contact us for a free consultation.
A Charitable Lead Trust (CLT) is a trust that benefits the charity with a current income stream; after a specified period of time, ownership of the assets in the trust then reverts back to you or your family. This is best for assets that are currently rapidly appreciating.
Example. John is only 45 years old and already has a taxable estate valued at $50m. This is entirely due to stock in a publicly traded company worth $50m. Despite the value, John is a small percentage owner of the company; he does not have control over it, so traditional valuation discount techniques would likely be ineffective. The stock worth $50m is projected to appreciate 20% annually over the next 5 years by which time the value will likely be around $125m; well over the estate tax exemption. John creates a Private Family Foundation. Thereafter, John also creates a Charitable Lead Trust that pays 20% annually for 5 years; he names his Private Family Foundation as the current charitable income beneficiary with his children as the remainder interest beneficiaries. John’s Private Family Foundation gets all income during the 5-year period and is flush with $75m. At the same time, John’s children receive the $50m in stock without any gift or estate tax consequences. Why? From the IRS’s perspective, paying 20% annually for 5 years means nothing will be left since 20% for 5 years equals 100%. The IRS does not concern itself with the actual rates of return since those are speculative at the time the trust is created. The IRS applies their own rate under Section 7520 of only 1.4%. As such, the children are predetermined to receive less than 5%; therefore, the stock worth $50m transfers to them entirely tax-free. In other words, a Charitable Lead Trust can be used to transfer rapidly appreciating assets without any gift or estate tax consequences. You also have a fully funded Private Family Foundation that can employ your children and compel the promotion of your charitable, religious, scholastic, political, or social goals for generations. Absent those goals, you would want to instead consider the use of a zeroed-out Grantor Retained Annuity Trust (GRAT). Give us a call to schedule a free consultation. Each case is unique, so giving us a call and allowing us to discuss your personal situation will grant us the opportunity to be creative and develop a custom-tailored plan that effectuates all of your life goals whether they be charitable or not.
Other Characteristics of Charitable Trusts
Charitable trusts are irrevocable trusts. The government could not permit a deduction if they were not irrevocable. This is critical to know because irrevocable trusts can be difficult to alter or amend without qualified legal counsel. Our estate planning team will counsel you to explain how a charitable trust could benefit your estate plan and meet the goals for the legacy you wish to leave.
What Other Benefits do Charitable Trusts Offer?
There are reasons beyond potential tax reduction to consider when including charitable trusts in your estate plan. Charitable trusts can provide a vehicle to maintain a social or political agenda. Because the charitable beneficiary can be a Private Family Foundation we establish for you, we can incorporate a 501(c)(4) educational foundation that, in turn, can operate its own SuperPAC. The Private Family Foundation can also host fundraising galas, dinner banquets, gaming nights, and cocktail parties. The Private Family Foundation can also organize, fund, and execute programs both locally and internationally whether it be a food drive here in the U.S. or digging water wells for rural residents of third-world countries. But the first step is giving us a call to schedule a free consultation so we can discuss and counsel you on your options.
If you would like to talk with our International Estate Planning team about how charitable trusts might work into your estate plan contact us today at (888) 595-5088.
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