A Charitable Remainder Trust is one of the most efficient estate planning tools available and is created for the purpose of converting appreciated, low-yielding property into higher-yielding property, while receiving an income tax deduction for the charitable contribution. The IRS has produced model forms but they do not include all of the provisions which may be beneficial to taxpayers. Charitable Remainder Trusts are subject to the anti-abuse, excise taxes which apply to private foundations.
Things to keep in mind: 1) If a person other than the grantor (or grantor’s spouse) is a non-charitable beneficiary, then a taxable gift has been made and the value of the gift must be determined. If the gift is for current income, then it qualifies for the annual gift exclusion. 2) A life income interest must be created for the lives of one or more non-charitable beneficiaries with the remainder interest passing to the charitable organization. The duration must be a definite term of years of the non-charitable beneficiaries. Distributions are taxed as ordinary income. Trust assets may be invested in tax-exempt securities to produce tax-free income to the non-charitable beneficiary. 3) If a grantor has a binding legal obligation to sell the property when it is transferred to the charitable remainder trust then the IRS will treat the grantor as the seller of the property and assess the capital gain tax.
A Charitable Lead Trust is designed to make a charitable contribution of the income generated by trust property while preserving trust principal for the grantor, the grantor’s family, or some other non-charitable beneficiary. It may be used to make lifetime or testamentary gifts of the remainder interest with little or no gift/estate taxes.
Following is a table highlighting the differences between a Charitable Remainder Trust and a Charitable Lead Trust. For more detailed information, please contact an estate planning attorney.
|Charitable Remainder Trust||Charitable Lead Trust|
|Tax-exempt trust unless it has unrelated business taxable income. The trust is taxable on all of its income as a complex trust and may use the charitable deduction and income distribution deduction if it has unrelated business taxable income.||Not tax-exempt unless it is a grantor-type lead trust it will receive an unlimited deduction for distributions to the charitable beneficiary.|
|Forms of Trusts|
|Charitable remainder annuity trust
Charitable remainder unitrust
|Grantor type lead trust
Non-grantor type lead trust