Estate Planning -Charity Flashcards
CRAT
charitable remainder annuity trust
- the grantor-donor transfers property to an irrevocable trust
- one or more non charitable Benes received either a fixed percentage of the initial FMV or a fixed dollar amount annually
- at the end of the term, the rest goes to one or more qualified charities
- no additional funding after the initial contribution
- annuity payout rate must be at least 5% annually for the grantor’s lifetime or the grantor and other Benes or for a term of 20 years
- the present value of the charitable remainder interest at the trusts inception must be at least 10% of the FMV of the transferred property
- income tax deduction the year the CRAT is funded
Can have an indefinite life
CRUT
- charitable remainder unitrust
- similar to a CRAT
- noncharitable beneficiaries receive a fixed percentage of the trust assets, as REVALUED ANNUALLY, thus providing for a possible inflation hedge if the assets appreciate in value
- additional contributions ARE allowed
- more flexible than a CRAT
- same 5% payout rule -annuity payout rate must be at least 5% annually for the grantor’s lifetime or the grantor and other Benes or for a term of 20 years
- version is net income with makeup charitable remainder unitrust
Can have an indefinite life
NIMCRUT
net-income-with-makeup charitable remainder trust
form of CRUT
-the payment to the non charity bene is limited to the lesser of the fixed percentage (5%) or the actual income from the trust
-if amount is less than stated % - any excess is forfeited
-also a provision to catch up or make up any difference between the fixed percentage and the actual income
-used as an alternative to a qualified pension plan to defer income while still working
Charitable Lead Trusts
CLAT or CLUT
trust that distributes income to a charitable bene for a specific term with the remainder passing to a non charitable bene (grantor or remainderman)
Income tax deduction for current value of payment stream
Future income taxed to grantor and not entitled to a deduction in future years
Annuity payout creates an estate tax deduction
Charitable Gift Annuity
Grantor donates to a charitable organization
Organization agrees to pay income for donors life
Major differences from CRAT
Charity gets money now
No 5% rule
Cost above what a normal annuity would cost is the charitable deduction
Pooled Income Fund
created and maintained by a charity
educational institutions and hospitals
- donor must contribute an irrevocable remainder interest to the charitable institution that maintains the fund
- charity must be a 50% charity and the property must be managed by the charitable remainder man
- property transferred must be commingled with the property that is transferred by other donors
- donor entitled to receive a pro rata share of the annual income based on the return of the fund
- no donor or bene may be a trustee of the fund
- the fund can’t invest in tax-exempt securities - munis
- the donor retains a life income interest
- No 5% Rule
ILIT
Wealth Replacement Trust
- removes the life insurance from the decedent’s gross estate
- proceeds free of estate taxes
- proceeds payable from an ILIT retain their character as nontaxable for income tax purposes
- may provide liquidity for paying taxes or for settlement costs for the estate
Advantages
- avoidance of probate
- flexibility in distribution of the assets to the trust beneficiaries
- management expertise of the independent trustee
- removal of life insurance proceeds from the decedent-insured’s gross estate
unfunded ILIT
- trust where the grantor gifts cash to the trust each year to pay the premiums of the policy
- would have to include a Crummey power on the beneficiary to obtain the gift tax exclusion
- most ILITs are unfunded
funded ILIT
type of trust that holds not only title to the life insurance policy, but also has income-producing assets
results in an income tax problem for the grantor
trust treated as a grantor trust
thus, often funded with muni bonds
Private Foundation
- established to direct charitable contributions for a specific purpose
- operating or nonoperating
- income tax rules are the same as those for other charitable contributions
- advantage: the donor can control the investment and distribution of any contributed money
- restriction is that at least 5% of the foundation’s assets must be distributed annually for charitable purposes
Can grant to a non charity individual
- study, travel or similar purpose - scholarship, fellowship, prize award - improve or enhance literacy, art, music, teaching
DISADVANTAGE
subject to excise tax
2% net investment income
15% penalty if does not distribute 5%
Supporting Organization
- formed to support the activities of another qualified public charity
- funds not controlled by the donor or the donors family- usually controlled by a BOD majority controlled by other than family. Family has no veto power
- activities must be controlled by the selected public charity
no 2% excise tax
Donor Advised Fund
- arrangement where the donor makes a gift to charity and then makes future recommendations regarding who should receive grants or future monies from the charity
- donor can name several charitable recipients
- immediate income tax deduction when the donation is made
- low costs and low required minimum contributions
- disadvantage: donor only has a limited right to control the management of the funds assets - and charity may place restrictions on future grants and can have substantial annual maintenance fees
Controlled by donor and sponsoring organization.
Bargain Sale
- sale of an asset between family members for less than FMV
- partly a sale and partly a gift
- difference between the sale price of the asset and the seller’s basis in the asset will be treated as a taxable gain to the seller for income tax purposes
- the difference between the FMV of the asset and the payment received by the seller is considered a gift
- the portion of the property treated as a table gift is added back to the seller’s taxable estate as an adjusted taxable gift (ATG) in arriving at the taxable base
