Charitable Remainder and Charitable Lead Trusts

Many of our clients use trusts to pass wealth to younger family members. However, many also wish to support charities both during and following their lifetimes. We help them achieve this goal.

Charitable remainder and charitable lead trusts are effective estate planning tools for these clients. These trusts not only minimize estate taxes but also unify families through philanthropic work. Buchanan & Stouffer has guided clients in the Rocky Mountain Region through the complex legal process of creating, maintaining or terminating charitable trusts. In doing this, we’ve assisted many clients in supporting hundreds of charities and nonprofits across the United States – and the world.

One of the most significant benefits of establishing a trust is protection from taxation. Transferring your property into a charitable trust will not only help you avoid capital gains taxes, but will also preserve cash flow for you and your spouse during your lifetimes. Our Denver attorneys at Buchanan & Stouffer can help you with:

A charitable remainder trust, which is a tax-exempt irrevocable trust. It ultimately helps you minimize both capital gains and regular income taxes by transferring your assets to the trust. The trust can sell the assets without realizing capital gains taxes. Also, the trust will then pay out a specified amount to you or your beneficiaries during your lifetime, or for a certain amount of years. After the trust term has ended, the remaining assets will be passed to the charity or charities of your choice. Learn more about charitable remainder trusts.

A charitable lead trust, which is a trust that is designed to produce cash flow for charitable beneficiaries. This is done by donating a portion of the trust income to a charity or charities each year for a specified number of years. At the end of the trust’s term, the remaining assets are then transferred to beneficiaries — typically children and grandchildren. We often encourage our clients to involve family members in the selection of charitable beneficiaries for their trusts. Learn more about charitable lead trusts.

Our attorneys understands that our clients’ needs and objectives vary widely – no two are alike. This is why we are prepared to learn about the financial and personal circumstances involved in every case that our firm handles. We are committed to helping our clients manage expectations regarding their estate planning and develop philanthropic goals that can be achieved through charitable trusts.

We have spent decades helping individuals create and manage both charitable remainder and charitable lead trusts. Our attorneys provide comprehensive legal assistance to clients who wish to terminate a charitable trust as well.

Charitable Remainder Trust: A Charitable Remainder Trust is an irrevocable trust set up by a client for his or her lifetime or a specified number of years that cannot exceed twenty. Married couples may also set up a charitable remainder trust together. Under the terms of the trust, the client retains the right to receive periodic cash payments each year. Payments can be received monthly, quarterly, semi-annually or annually. At the end of the term of the trust or upon the death of the client, the trust pays its remaining assets to one or more charitable organizations selected by the client.

There are two types of qualifying Charitable Remainder Trusts. The first of these is a Charitable Remainder Annuity Trust (CRAT), which pays out a fixed dollar amount to the client over the specified term of the trust. This amount does not change and must be paid regardless of the earnings of the assets of the trust.

The second type of charitable remainder trust is a Charitable Remainder Unitrust (CRUT). A CRUT pays a specified percentage of the fair market value of its assets to the client periodically every year. The amount paid out is fixed as of the first day of that year. There are three types of CRUTs. The first is often referred to as a simple unitrust and pays a fixed percentage of the fair market value of the trust assets regardless of the earnings or liquidity of the trust. The second type of CRUT is known as a net income with makeup provision CRUT. This type of trust pays out the lesser of the fixed percentage or the net income of the trust. If there has been a shortfall in the income of the trust in prior years, the trust may make up this shortfall from excess income in subsequent years. The final type of Charitable Remainder Unitrust is often referred to as a Flip Charitable Remainder Unitrust. This type of trust starts out as a net income with makeup provision trust and converts to a simple unitrust after the sale of a specified asset.

An income tax deduction is generated upon when property is contributed to a Charitable Remainder Trust. Charitable Remainder Trust.  This deduction equals the fair market present value of the remainder interest to be eventually contributed to charity, using actuarial tables provided by the IRS and the Applicable Mid-Term Federal Rate of interest. This value of the remainder interest is calculated using certain actuarial tables required by the Treasury Regulations and using the Applicable Federal Mid-term Rate. The amount of the annuity payment or fixed percentage amount will have an impact on the calculation. The larger the annuity payment or the fixed percentage amount, the smaller the deduction. Additionally, the longer the term of the trust or the life expectancy of the client, the smaller the charitable deduction.

In addition to producing an income tax deduction, charitable remainder trusts are tax exempt. As a result, if appreciated property is contributed by the client to a charitable remainder trust and then sold, no capital gains tax on the sale will be realized. By selling an appreciated asset inside of a charitable remainder trust, a client can preserve the asset base and produce cash flow for the term of the trust.

Charitable Lead Trust: A Charitable Lead Trust is a trust that may be established by a client during their lifetime or upon their death that makes periodic payments to charitable organizations for a specified period of time. The client may select the term of the trust themselves as well as the amount to be paid to charity each year. There are two types of Charitable Lead Trusts. The first of these is a Charitable Lead Annuity Trust (CLAT) which pays out a fixed dollar amount to charitable organizations for the term of the trust. The second type is a Charitable Lead Unitrust (CLUT) which pays a fixed percentage of the value of its assets to charitable organizations. When either type of Charitable Lead Trust terminates, the trust pays its remaining assets to the client’s specified beneficiaries. The beneficiaries may be individual family members or one or more trusts established for the benefit of family members.

The transfer of assets to a Charitable Lead Trust represents a taxable gift that does not qualify for the annual gift tax exclusion. The present value of the payout to charitable organizations is computed utilizing actuarial tables specified by the Treasury Regulations and the applicable Federal Mid-term Rate. If the Charitable Lead Trust is established at the time of the client’s death, the present value of the anticipated payout to charitable organizations will produce an estate tax deduction. The Charitable Lead Trust is a powerful tool for generating estate or gift tax deductions, while providing substantial support for a client’s favorite charities.

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Philanthropic and Charitable Planning