Charitable Trusts

Charitable Trusts

Charitable Trusts

At Bethel Law we are often asked about the process for setting up charitable trusts. Many of our clients have aspirations toward establishing this type of trust, but state law can often create a confusing maze of rules, regulations, and loopholes which make expert advice absolutely necessary. The attorneys at Bethel Law have extensive experience in helping our clients achieve their charitable goals, while at the same time maximizing tax benefits. Depending upon a client’s specific needs and goals, we can offer advice on establishing charitable remainder unitrusts, charitable lead annuity trusts, or donor advised funds. Establishing a charitable trust will require a number of procedures in order to comply with the law. In accordance with California state law, all charitable trusts must be properly registered with the Attorney General’s office. Also, the charity must comply with all regulations set forth in the Nonprofit Integrity Act of 2004. Financial disclosure reports must be filed with the Attorney General, and every year the charity must complete the Annual Registration Renewal Fee Report. There may be additional requirements based upon the amount of the charity’s annual revenue and resources. These regulations were put into place in order to ensure that funds designated to charities do indeed fulfill the original intent of the charity. This also aids the state in creating guides that provide full disclosure to the public, so that donors may make responsible and informed decisions with regard to charitable giving. The Attorney General’s office may conduct investigations or take legal action in order to uphold the law and protect the interests of both charities and donors. Given the many complicated steps involved in setting up and maintaining a charitable trust, it is clear that expert guidance is necessary in order to comply with the law. Our legal team here at Bethel Law provides an experienced knowledge base to our clients, so that their interests are fully protected while maximizing the benefits of establishing a charitable...

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Charitable Lead Unitrust (CLUT)

Charitable Lead Unitrust (CLUT)

When a term-of-years CLUT is established, a donor transfers cash or other assets to an irrevocable trust. A charity you select receives variable annuity payments from the trust for the term of years you have specified. That means each year the value of the trust’s assets is re-determined. Although the charity will continue to receive the same percentage of the trust’s assets each year, as the total value increases, the charity receives more. If the value of the trust’s assets fall, the charity will receive less. For example, if the trust is worth $1,000,000 when you create it and you’ve given the charity a 6% annuity, it will receive $60,000 in the first year. If the trust doubles in value in the second year, the charity will still receive 6% – but of $2,000,000, i.e., $120,000. Of course, if the value of the trust in the third year falls to only $500,000, the charity receives 6% of $500,000, $30,000. When the trust ends, assets in the trust will pass to the non-charitable remainderperson or persons you have specified. Although this party is usually a child or grandchild, it can be any person you select – including someone who is not legally related to you. You can set up a CLUT during your lifetime or at death as a form of bequest. Both corporations and individuals may establish lead trusts. You can set up a CLUT so that you will receive an immediate and sizeable income tax deduction. In the second and following years, you must report the income earned by the trust even though it is actually paid to the charity in the form of an annuity. What is the advantage of a trust that produces a high deduction in the first year but requires you to report income you don’t receive in later years? One advantage is the acceleration of the deduction. For example, suppose you have just won the lottery, closed an incredibly large case, or sold a very highly appreciated asset. Perhaps you reasonably expect that in future years, your income will drop considerably. It’s good planning to have a very high deduction in a high bracket year even if you have to report that income in lower bracket years. You are spreading out the income (and the tax) over many years. Another advantage of the CLUT is that it allows a discounted gift to family...

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Charitable Lead Annuity Trusts (CLAT)

Charitable Lead Annuity Trusts (CLAT)

You create a CLAT by transferring cash or other assets to an irrevocable trust. A charity receives fixed annuity (principal and interest) payments from the trust for the number of years you specify. At the end of that term, assets in the trust are transferred to the non-charitable remainderperson (or persons) you specified when you set up the trust. Usually, this person is a child or grandchild but can be anyone, even someone who is not related to you. You can set up a CLAT during your lifetime or at your death. Both corporations and individuals may establish lead trusts. You can set up a CLAT so that you will receive an immediate and sizable income tax deduction. In the second and following years, you must report the income earned by the trust even though it is actually paid to the charity in the form of an annuity. What is the advantage of a trust that produces a high deduction in the first year but requires you to report income you don’t receive in later years? One advantage is the acceleration of the deduction. For example, suppose you have just won the lottery, closed an incredibly large case, or sold a very highly appreciated asset. Perhaps you reasonably expect that in future years, your income will drop considerably. It’s good planning to have a very high deduction in a high bracket year even if you have to report that income in lower bracket years. You are spreading out the income (and the tax) over many years. Another advantage of the CLAT is that it allows a discounted gift to family members. Under present law, the value of a gift is determined at the time the gift is made. The family member remainderman must wait for the charity’s term to expire; therefore, the value of the remainderman’s interest is discounted for the time cost of waiting. In other words, the cost of making a gift is lowered because the value of the gift is decreased by the value of the annuity interest donated to charity. When the assets in the trust are transferred to the remainderman, any appreciation on the value of the assets is free of either gift or estate taxation in your estate. Many people of wealth set up CLATs at death (a TCLAT or Testamentary Charitable Lead Annuity Trust) through their living trusts. The present value of...

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Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Annuity Trust (CRAT)

When a charitable remainder annuity trust is established, a gift of cash or property is made to an irrevocable trust. The donor (and/or another non-charitable beneficiary) retains an annuity (fixed payments of principal and interest) from the trust for a specified number of years or for the life or lives of the non-charitable beneficiaries. At the end of the term, the qualified charity specified in the trust document receives the property in the trust and any appreciation. Most gifts made to a charitable remainder annuity trust qualify for income and gift tax charitable deductions (or in some cases an estate tax charitable deduction). A charitable deduction is permitted for the remainder interest gift only if the trust meets certain criteria. A trust qualifies as a charitable remainder annuity trust if the following conditions are met: * The trust pays a specified annuity to at least one non-charitable beneficiary who is living when the trust is created. Annuities can be paid annually, semiannually, quarterly, monthly, or weekly. * The amount paid, as an annuity, must be at least 5%, but less than 30% of the initial net fair market value of the property placed in the trust. The charity’s interest at inception also must be worth at least 10 percent of the value transferred to the trust. * The annuity is payable each year for a specified number of years (no more than 20) or for the life or lives of the noncharitable beneficiaries. * No annuity is paid to anyone other than the specified non-charitable beneficiary and a qualified charitable organization. * When the specified term ends, the remainder interest is transferred to a qualified charity or is retained by the trust for the use of the qualified charity. * The Internal Revenue Service has also ruled that a trust is not a charitable remainder annuity trust if there is a greater than 5% chance that the trust fund will be exhausted before the trust ends. The annuity paid must be a specified amount expressed in terms of a dollar amount (e.g., each non-charitable beneficiary receives $500 a month) a fraction, or a percentage of the initial fair market value of the property contributed to the trust (e.g., beneficiary receives 5% each year for the rest of his life). The grantor will receive an income tax deduction for the present value of the remainder interest that will ultimately pass...

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Charitable Remainder Unitrust (CRUT)

Charitable Remainder Unitrust (CRUT)

When a charitable remainder unitrust is established, a donor transfers cash and/or property to an irrevocable trust but retains (either for himself or for one or more non-charitable beneficiaries) a variable annuity (payments that can vary in amount, but are a fixed percentage) from the trust. At the end of a specified term, or upon the death of the beneficiary (or beneficiaries, and the donor and the donor’s spouse can be the beneficiaries), the remainder interest in the property passes to the charity the donor has specified. The principal difference between a charitable remainder unitrust and a charitable remainder annuity trust is that a unitrust pays a varying annuity. In other words, the amount paid is likely to change each year. The payable amount is based on annual fluctuations in the value of the trust’s property. As it goes up, so does the annuity paid each year. If it drops in value, so will the annuity. A gift to a charitable remainder unitrust will qualify for income and gift tax charitable deductions (or an estate tax charitable deduction) only if the following conditions are met: * A fixed percentage (not less than 5% nor more than 50%) of the net fair market value of the assets is paid to one or more non-charitable beneficiaries who are living when the unitrust is established. The charity’s actuarial interest must be at least 10% of any assets transferred to the trust. * The unitrust assets must be revalued each year, and the fixed percentage amount must be paid at least once a year for the term of the trust, which must be fixed period of 20 years or less, or must be until the death of the noncharitable beneficiaries, all of whom must be living at the beginning of the trust. * No sum can be paid except the fixed percentage during the term of the trust and at the end of the term of the trust, the entire balance of the trust’s assets must be paid to one or more qualified charities. The donor receives an immediate income tax deduction for the present value of the remainder interest that will pass to the charity at the end of the term. Because a charitable remainder unitrust is exempt from federal income tax (the income and gains of the trust are only taxed when they are distributed to the non-charitable beneficiaries as part...

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Easier Now to Name Charity a Death Beneficiary of Retirement Accounts

Easier Now to Name Charity a Death Beneficiary of Retirement Accounts

REVISED: Simplified retirement account distribution rules now allow donors to name charities or charitable trusts as death beneficiary of part or all of their savings without fear of exhausting the account prematurely. Account owners will calculate how much to take out each year according to a uniform table (the applicable distribution period) that assumes a joint life expectancy with a survivor beneficiary who is ten years younger. The death beneficiary can be changed at any time, including after death. Taxpayers may rely on the proposed regulations immediately and restructure their 2001 payments – even if they have been making withdrawals for many years under a different schedule. Under prior law, naming a charity, or charitable trust, as a death beneficiary of an IRA or other retirement account could force donors into accelerated distributions. Result? The account might be emptied out by the time the charity received anything. Under the new rules, making a charity a beneficiary will not increase the amounts that must be withdrawn annually. Donors now can name a charity as beneficiary of part or all of their IRAs without increasing annual distributions during life. A charity that is a co-beneficiary of a retirement account could cash out of the arrangement after the donor’s death, permitting the other beneficiaries to use their own life expectancies to calculate future distributions. It should be more attractive to name charitable remainder trusts to receive IRA proceeds at death. The trust will generate an estate tax charitable deduction and will not be depleted by IRD tax. Under prior law, naming the charitable remainder trust as beneficiary sped up distributions during the donor’s...

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