As the new administration and other constituents are discussing income tax increases for wealthy Americans and lowering the estate tax exemption (currently $11.7 million), many Americans are wondering what planning opportunities are still safe for them to consider. Utilizing trusts as part of a charitable planning strategy could be an answer to some of the income and estate tax concerns that exist. This article will focus on several common charitable giving strategies available using trusts. Charitable Remainder Trusts (CRTs) Charitable Remainder Trusts (CRTs) pay amounts to one or more noncharitable beneficiaries (often the grantor) for their lifetime or over a fixed period of up to 20 years. The remainder is then paid to charitable beneficiaries at the end of the trust term. There are two types of distribution options that can be used when choosing the payment options to the income beneficiary(ies):
- Charitable Remainder Annuity Trusts (CRATs) which pay a fixed amount each year to the noncharitable beneficiaries (donor, donor’s spouse, or children); and
- Charitable Remainder Unitrusts (CRUTs) which pay a fixed percentage of the fair market value of the trust assets, generally valued at the beginning of each year.
- Non-grantor-type CLTs: The income interest is paid to charity and the remainder is paid to a noncharitable beneficiary other than the donor or donor’s spouse. Since the donor and donor’s spouse are not beneficiaries of the trust, income generated from the assets is taxed to the trust, and the trust deducts the payments made to the charity. The donor does not have to pick up any income from the trust assets and is not entitled to an income tax deduction on amounts passing to the charitable beneficiary. Only the remainder interest passing to the noncharitable beneficiary is subject to gift or estate tax when the trust is funded. Gift or estate tax may be due if the value of the remainder interest exceeds the donor’s applicable exclusion amount ($11.7 million for 2021, plus any deceased spouse’s unused exclusion amount if the portability election was made).
- Grantor-type CLTs: The income interest is paid to charity and the donor is the remainder beneficiary in the trust. The donor (grantor) recognizes the trust’s income as it is earned even though the grantor does not legally have access to the income of the trust. The grantor also receives a deduction for the payments made to the charity. Since the charitable contribution is considered “for the use of” the charity, it is subject to the 30% AGI limitation even if the original contribution is cash. If the original contribution was other than cash, it may be subject to a lower AGI limitation. Any charitable deduction is not used in the year it is generated, it can be carried forward for up to five years.
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