Charitable Remainder Trust in DC

A charitable remainder trust is a trust for the benefit of a charitable institution. It is one tool used to minimize an estate’s overall estate tax liability for federal and estate tax purposes. An experienced DC trust lawyer helps clients determine if this is a suitable option for the future of their assets.

If a you are interested in a Charitable Remainder Trust but is unsure how it may affect their heirs, taxes, or the remainder of the estate, contact your DC trust lawyer to learn more and make the best decision for you and your family.

Types of Charitable Remainder Trusts and When to Implement One

There are two types of charitable remainder trusts: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). The main difference is that a charitable annuity trust is a trust that pays estate in dollar amount; a trust that pays a fixed percentage of the trust assets is a charitable remainder unitrust.

A charitable remainder trust is one piece of a comprehensive estate plan. Recommendation to use a charitable remainder trust usually occurs when a client exceeds the federal estate tax filing threshold, which is currently $5,450,000 for decedents dying in the 2016 tax year.

Charitable remainder trusts can be a good fit for individuals charitably in kind or who have had a past history of providing to charitable institutions and have a concern about reducing their overall estate tax exposure.

Requirements Imposed on Charitable Remainder Trusts

There are several basic requirements. The first is that the trust instrument must create a valid trust. The trust must be a CRAT or a CRUT.  Generally, the term interest must be paid to one or more named charitable persons. The entire principal must be irrevocably transferred to the trust or irrevocably transferred to the organization, or be retained in trust for charitable use at the time that the non-charitable income interest terminates. The trust language must not permit any additional contributions to the trust to be made.  The trustee must be able to invest the trust principle in a way that would allow for income or gain.  These are just a few of the requirements for the creation of a CRAT or a CRUT.  Creating a CRAT or a CRUT is a very nuanced type of estate planning that often requires the assistance of an experienced trusts attorney to create and administer.  Their creation and administration are addressed in both the Internal Revenue Code and in several Internal Revenue Service procedures.

Obtainable Tax Advantages from Charitable Remainder Trusts

There are a number of possible income advantages in federal estate tax benefits that can be a result of creating a unitrust or a charitable remainder trust, depending on the type of trust that is created and the overall income tax and federal estate tax exposure to the initial grantor. The tax benefits are dependent on the nature and type of assets as well as the nature and type of the charitable remainder trust that is created.

Planning Considerations

There are several planning considerations. This is a very complex tax concept, and should be selected and analyzed within the context of an overall comprehensive estate plan. A charitable remainder trust could result in generation skipping tax issues. If not done correctly, the results can result in both income and estate tax consequences.

If a transferor chooses an annuity trust, the non-charitable beneficiary will receive a uniform distribution or fixed amount each year. There are some burdens of record keeping, depending on the type of trust used, so the administration of these trusts is continual each year.  These types of trusts require continued administration. Selecting how these trusts are funded, the amount of the trust that are funded, and what assets are used to fund these trusts are also a very important to make a determination that will or will not result in a capital gain or capital loss to the donor and to understanding the maximizing of the income tax.

Also important are applications of funding the trust, consideration of how the trust, and what the income will tax consequences will be as the distributions are made to the beneficiaries.

Charitable Lead Trust

A charitable lead trust is a trust in which the term interest is paid to a charitable beneficiary, but the remainder interest either reverts to the grantor or is paid to a non-charitable party at the end of the trust term.

Charitable remainder trusts and charitable lead trusts are opposite concepts. Whereas a charitable remainder trust will hold a trust in the term of years and then revert to a charity, a charitable lead trust will hold the trust for a term of years to a charity and then revert to a non-charitable interest.

Structured as a Grantor Trust

When a charitable lead trust is structured as a grantor trust, the grantor can obtain an income tax charitable deduction in the year that the trust is established. The grantor’s deduction for income tax purposes is limited to 30% of the grantor’s contribution because it is a gift for the use of rather than to the charity. The grantor’s immediate deduction is recaptured over the term of the trust as the trust income is taxed to the grantor.

Why it is Recommended

The recommendation of a charitable lead trust is made as part of an overall comprehensive estate tax plan by a DC trusts lawyer. Charitable lead trust and charitable remainder trust are complex estate and income tax concepts that are recommended or implemented after an analysis is completed of an individual’s overall estate or income tax exposure and as one taken into consideration of the nature and assets and goals of a grantor.

Role of an Attorney

The creation and the administration of a charitable remainder trust and charitable lead trust, whether it is a CRAT or a CRUT, is a very complicated –since it includes a complex set of tax provisions.

Understanding the applicability of charitable remainder or lead trusts as well as how to create and administer them should be left to an estates and trust attorney familiar with this concept and knowledgeable about how a charitable remainder trust or a charitable lead trust can be incorporated into a comprehensive estate plan.