Trusts and Estates Blog

Charitable Trusts Explained

Girl holding Thank You Sign XSmallOne of the major questions people have regarding estate planning is how to avoid taxes and other costs that would diminish the size of their estate. While there are several ways to avoid state and federal estate taxes, one way is through a charitable trust.

Charitable trusts are usually thought to be for the sole purpose of donors who wish to give to charities. While that is a main reason many people establish a charitable trust, the trust can also provide substantial tax and income benefits to the donor. The trust can be for any charity you wish to help, from helping children to helping find a cure for cancer.

Several variations of a charitable trust exist and each serve a certain purpose. Consider the following explanation of charitable trusts and their usefulness.

Charitable Remainder Trust. This trust is used to donate assets (especially appreciated assets) to a charity now, but with you receiving benefits for a set number of years or the remainder of your life. The trust holds the property and can sell it without added capital gains tax, and also gives the trust the ability to create a diversified portfolio in which it can invest. The donor will receive payment from the trust at least annually and upon death, the principal of the trust will be given to the charity free of income or estate taxes. (The trust owner will receive a current income tax charitable contribution deduction which can be substantial.) There are two types of Charitable Remainder Trusts, Charitable Remainder Annuity Trust and the Charitable Remainder Unitrust.

Charitable Remainder Annuity Trust. The most common of the two Charitable Remainder Trusts, the Charitable Remainder Annuity Trust pays the trust owner an annual amount based on annuity payments (a fixed percentage of the initial value of the assets contributed, i.e. 5% initially).

Charitable Remainder Unitrust. A Charitable Remainder Unitrust makes annual payments to the trust owner based on a fixed percentage of the value of the assets owned by the trust each year, i.e., 5% of the trust assets each January 1st. This trust is most often used when assets are easily valued (such as publicly traded stocks) rather than used for assets that would require a formal appraisal (real estate, closely held businesses).

Charitable Lead Trust. Assets are given to the Charitable Lead Trust. The trust owner can establish one or more charities to receive annual annuity payments. When the trust ends (or upon death), the trust owner’s heirs will receive the principal of the trust. Again, this helps the estate planner avoid substantial gift or estate taxes when transferring assets to heirs. There can also be a substantial income tax deduction when the assets are transferred to the trust. If the entire income tax deduction cannot be used in the first year, the deduction can be carried forward an additional 5 years. There are also two types of Charitable Lead Annuity Trusts, and Charitable Lead Unirusts and Charitable Lead Trust. These will be discussed in more detail in another article.

Antelope Valley estate planning law firm Thompson Von Tungeln (TVT) offers sophisticated estate planning and administration for the affluent, discriminating client. As Board Certified Specialists in Estate Planning, Trusts and Probate as certified by the State Bar of California Board of Legal Specialization, partners Mark E. Thompson and Kevin L. Von Tungeln are expertly equipped to serve these clients with the creative, effective and custom solutions they demand. For more information, contact TVT at 661-945-5868 or visit their websites at www.EstatePlanningSpecialists.com and www.Medi-CalHelp.com.

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