Charitable Lead Trusts

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  • 88:118:124
  • Charitable Lead Trusts

    1. 1. Donor CLT Charity Initial Transfer Anything Left Over Payments for Life/Years Charitable Lead Trusts Donor or heirs
    2. 2. All slides are taken from this book which includes detailed explanations of all concepts. Available from Amazon.com Full color version available at www.createspace.com/4707238
    3. 3. Charitable Lead Trust CLAT pays fixed $ annuity CLUT pays % of trust assets Charitable Remainder TrustCRAT pays fixed $ annuity CRUT pays % of trust assets Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor orheirs Donor Charity Initial Transfer Anything Left Over Payments for Life/YearsDonoror heirs
    4. 4. Why do charities like Charitable Lead Trusts?
    5. 5. A Charitable Lead Trust locks in an immediate stream of charitable gifting without requiring continuing requests
    6. 6. Why would a donor use a Charitable Lead Trust?
    7. 7. The primary motivation for using a Charitable Lead Trust is for tax advantages, most commonly in gift and estate taxes
    8. 8. Charitable Lead Trusts are less common than Charitable Remainder Trusts, but usually involve larger dollar amounts $857,297 Average size $3,165,337 Average size Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income
    9. 9. Charitable split-interest trusts by number Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income 6% 93% 1% Charitable Lead Trusts Charitable Remainder Trusts Pooled Income Funds
    10. 10. 18% 81% 1% Charitable Lead Trusts Charitable Remainder Trusts Pooled Income Funds Charitable split-interest trusts by value Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income
    11. 11. Charitable split-interest trusts by distributions to charity Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income 37% 62% 1% Charitable Lead Trusts Charitable Remainder Trusts Pooled Income Funds
    12. 12. 0% 10% 20% 30% 40% 50% 60% 70% CRT CLT Charitable beneficiary distribution sharebytype This may reflect greater CLT use of private foundations as charitable beneficiaries Source: Split interest trusts, distributions of principal and interest combined, filing year 2011, Lisa Schreiber, IRS Statistics of Income
    13. 13. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donoror heirs CLT Payments may be for life or any time period and can be for any fixed dollar (CLAT) or ongoing % (CLUT) amount Donor Charity Initial Transfer Anything Left Over Payments for Life/YearsDonoror heirs CRT Payments may be for life or up to 20 years, and must be 5% to 50% of initial (CRAT) or ongoing (CRUT) trust assets
    14. 14. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donoror heirs CLT The trust is not tax exempt, so the trust (non-grantor CLT) or donor (grantor CLT) must pay taxes on trust earnings Donor Charity Initial Transfer Anything Left Over Payments for Life/YearsDonoror heirs CRT The trust is tax exempt, so there are no immediate taxes on trust earnings
    15. 15. Donor CLT (Non-Grantor) Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs
    16. 16. Using non-grantor Charitable Lead Trusts to cut gift and estate taxes
    17. 17. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder Gift taxes are not paid on the ACTUAL remainder that eventually goes to the heirs Gift taxes are paid on the present value of the PROJECTED remainder going to the heirs
    18. 18. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder If the ACTUAL amount is higher than the PROJECTED amount, this part goes to heirs tax free
    19. 19. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder If actual growth is greater than the §7520 rate, the ACTUAL remainder will be greater than projected The PROJECTED remainder assumes investment growth at the §7520 rate
    20. 20. Gift tax on the transfer less the projected value of charity’s payments Value of projected payments to charity (not taxed) Value of projected remainder to family (taxed)
    21. 21. What is the projected value of the payments to charity?
    22. 22. Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates Multiply payment by annuity factor in IRS Pub. 1457http://www.irs.gov/Retirement-Plans/Actuarial-Tables Value of CLAT payments
    23. 23. Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates Can choose current or one of last two month’s rate $1MM/yearfor 11yearsCLAT on10/31/13 Aug 2.0% Sept 2.0% Oct 2.4%
    24. 24. Value of annuity
    25. 25. Find the §7520 rate 2.0%http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates To get the highest annuity valuation [lowest gift tax] select Sept 2.0% $1MM/yearfor 11yearsCLAT on10/31/13
    26. 26. Table B – Annuity interest for a Term Certain Interest at 2.0 Percent Years Annuity Income Interest Remainder 8 7.3255 0.195737 0.853490 9 8.1622 0.211507 0.836755 10 8.9826 0.195737 0.820348 11 9.7868 0.211507 0.804263 12 10.5753 0.195737 0.788493 Find the §7520 rate 2.0%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 $1MM X 9.7868www.irs.gov/Retirement-Plans/Actuarial-Tables $1MM/yearfor 11yearsCLAT on10/31/13
    27. 27. Find the §7520 rate 2.0%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 $1MM X 9.7868www.irs.gov/Retirement-Plans/Actuarial-Tables Value of annuity $9,786,800 If annuity pays more than annually, add adjustment factor from Table K $1MM/yearfor 11yearsCLAT on10/31/13
    28. 28. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder If actual growth is 8%, the ACTUAL remainder will be $6,670,903 Transfer $10MM to a CLAT with $1MM/year charitable annuity for 11 years ($9,786,800 value), pay tax on $213,200 present value of PROJECTED remainder to kids
    29. 29. A CLT can “zero out” gift and estate taxes by setting the non-charitable value at zero
    30. 30. Find the §7520 rate 2.0%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 $1,021,785 X 9.7868www.irs.gov/Retirement-Plans/Actuarial-Tables Value of annuity $10,000,005 If annuity pays more than annually, add adjustment factor from Table K $1,021,785/ yearfor11 yearsCLATon 10/31/13
    31. 31. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder If actual growth is 8%, the ACTUAL remainder will be $6,308,281 The PROJECTED remainder of $10MM at 2% §7520 with $1,021,785/year charitable payments for 11 years is $0, resulting in $0 gift taxation
    32. 32. Donor Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Projected Value of Remainder The ACTUAL remainder of $6,308,281 is not taxed The $0 present value of the PROJECTED remainder is taxed
    33. 33. If the charitable gift (or bequest) was already planned, the zeroed-out CLAT (or zeroed-out testamentary CLAT) provides a no cost chance at tax-free transfers to family
    34. 34. Choose fast growing assets to put in the non-grantor CLT
    35. 35. A step-CLAT increases payments to charity by a fixed percentage, paying less in early years and more in later years Year 5 $207 (+20%) Because more assets stay in longer, more growth can occur, leaving more for family Year 6 $249 (+20%) Year 7 $299 (+20%) Year 8 $299 (+20%)
    36. 36. 1 2 Year 10 Year 9 Yr8Yr7Yr6Yr5Yr4Yr3Yr2Yr1 A “shark fin” CLAT pays almost everything to charity in the last year or years This more extreme approach has not yet received IRS approval or disapproval
    37. 37. Donor Charity Initial Transfer Anything Left Over Payments for Years Donor’s heirs Projected Value of Remainder If ACTUAL length of life is less, the ACTUAL remainder will be greater than projected If payments are for life, the PROJECTED remainder is based on NORMAL life expectancy
    38. 38. The measuring life/lives must be donor, any ancestor of the remainder beneficiaries, or spouses of either. Measuring life cannot be used “if there is at least a 50 percent probability that the individual will die within 1 year” unless person actually lives at least 18 months.
    39. 39. Your son called to tell you that you are the measuring life for his CLT, so make sure to live slightly over 18 more months
    40. 40. While you are waiting… • A CRT can be used to generate current income while waiting for a CLT to mature • Multiple CLTs can be staggered to end at different times to smooth the transfer • CLTs are often established at death (testamentary)
    41. 41. Donor CLT (Non-Grantor) Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs
    42. 42. Donor CLT (Non-Grantor) Donor’s Private Family Foundation Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Family PF
    43. 43. Distributing CLAT Shares Early IRS has approved early termination when the CLAT immediately pays all future required payments (undiscounted) to the charityPLRs 200225045, 199952093, 9844027
    44. 44. Issues for Generation Skipping Transfers • CLATs (not CLUTs) taxed on projected and actual amount transferred to skip persons • If charity can be changed, tax is recipient liability, so trust payment of tax creates more tax
    45. 45. Growth can also avoid taxation using a non-charitable plan (Grantor Retained Annuity Trust), but the creator must outlive the term of the GRAT for it to work
    46. 46. I want to donate income from my assets, but I am already over the income percentage limit for deductions
    47. 47. Donor (Non-Grantor) CLT taxed on income Charity Initial Transfer Anything Left Over Payments for Life/Years Donor’s heirs Charitable deductions to CLT with no income limitationsCLT can also pay out any income in excess of annuity or unitrust amount
    48. 48. Donor Charity Initial Transfer Anything Left Over Payments for Years CLT (Grantor)
    49. 49. Grantor CLT • Future income is taxed to donor • Donor gets a deduction • Remainder included in donor’s estate (typically returns to donor) Non-Grantor CLT • Future income is taxed to trust • Trust deducts payments to charity • Remainder not included in donor’s estate
    50. 50. I give regularly, but I need a giant deduction to offset a big spike in income this year (e.g., due to a sale, Roth conversion, bonus, etc.)
    51. 51. In a grantor CLT, the donor commits to future gifts and receives an immediate tax deduction for the present value of these gifts
    52. 52. Donor Charity Initial Transfer Anything Left Over Payments for Years or Life CLT (Grantor)
    53. 53. Donor Charity Initial Transfer Anything Left Over $10,000 Payments for 20 years Funding $10,000/year gifts through a 20-year grantor CLAT (returning remainder to donor) creates an immediate deduction of • $163,514 at 2% §7520 rate • $98,181 at 8% §7520 rate
    54. 54. What is a CLT “Super Trust”?
    55. 55. Grantor CLTs • Donor gets a deduction • Future income is taxed to donor • Remainder included in donor’s estate (often returns to donor) Non-Grantor CLTs • Future income is taxed to trust • Trust deducts payments to charity • Remainder not included in donor’s estate
    56. 56. Grantor CLTs • Donor gets a deduction • Future income is taxed to donor • Remainder included in donor’s estate (often returns to donor) Non-Grantor CLTs • Future income is taxed to trust • Trust deducts payments to charity • Remainder not included in donor’s estate CLT “Defective Grantor Trust” (aka “SuperTrust”)
    57. 57. CLT“Defective Grantor Trust”(aka“Super Trust”) Non-Grantor CLTs • Future income is taxed to trust • Trust deducts payments to charity • Remainder not included in donor’s estate A Grantor CLT for Income Tax purposes. A Non-Grantor CLT for Estate Tax purposes. Grantor CLTs • Donor gets a deduction • Future income is taxed to donor • Remainder included in donor’s estate (often returns to donor)
    58. 58. How does it work? • Estate tax and income tax grantor trust definitions are not precisely identical • If donor keeps a right to get trust property by substituting other property of equal value, it causes grantor treatment for income tax, but not estate tax
    59. 59. The “Defective Grantor Trust” or “Super Trust” attempts to mix characteristics of the two kinds of CLTs. It may work, but lacks conclusive authority. Less aggressive planners might leave this superhero in the phone booth.
    60. 60. What kind of property can a CLT hold?
    61. 61. CLTs must follow same rules as private foundations for self-dealing, taxable expenditures, jeopardizing investments, and excess business holdings
    62. 62. A GRANTOR CLT may be a subchapter S corporation shareholder because donor is treated as stock owner NON-GRANTOR CLT should not hold subchapter S shares, because trust is treated as the owner (allowed only when ESBT election eliminates charitable deductions) Subchapter S-Corp Stock
    63. 63. Unrelated business income (e.g., from debt-financed property or actively managing business) is allowed. But in a non-grantor CLT, giving this income to charity is deductible only at 50% (to public charity) or 30% (to private foundation).
    64. 64. Donor CLT Charity Initial Transfer Anything Left Over Payments for Life/Years Charitable Lead Trusts Donor or heirs
    65. 65. Help me HERE convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise donors and you reviewed these slides, please let me know by clicking
    66. 66. If you clicked on the link to let me know you reviewed these slides… Thank You!
    67. 67. This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University

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