Charitable Planning CRTs, CLTs and the Increasing Payment CLAT

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EXECUTIVE SUMMARY

* Charitable trusts offer taxpayers an opportunity to support philanthropic causes while providing benefits to themselves or their heirs and saving income, estate or gift taxes. CPAs can advise clients on the type of charitable trust that best suits their goals and characteristics.

* A charitable remainder trust (CRT) provides an annuity to noncharitable beneficiaries for a term of years, either as a fixed amount (charitable remainder annuity trust, or CRAT) or percentage of assets (charitable remainder unitrust, or CRUT) and the remainder to a charitable beneficiary. Two key advantages of a CRT are a current charitable deduction for the donor of the actuarial value of the remainder interest and its ability to hold and sell certain low-basis, highly appreciated assets donated by the client.

* A charitable lead trust (CLT) provides an annuity to a charitable beneficiary and a remainder to the donor or the donor's spouse or heirs. A key advantage is its potential for savings on gift taxes and either a charitable deduction for the donor (grantor CLT) or payment of income tax by the trust rather than by the donor (nongrantor CLT).

* A relatively new form of CLT is the increasing payment charitable lead annuity trust (IPCLAT). As the name implies, it can provide a steadily increasing annuity with or without a "balloon" payment, to time distributions optimally for investing outlook and client goals.

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One of the main reasons people give to charity is for their ego or image they want to be seen in the community as philanthropic. Another main reason some donate is for the tax breaks. Others give to charity for truly altruistic reasons. Yet others leave money to charity because they believe their heirs are sufficiently provided for. For whatever reason they donate, many clients want to incorporate charitable giving into their estate plan. For them, a charitable trust may be a perfect fit, since it can be an effective way for clients to achieve one or all of these goals: give money to charity, provide a limited monetary benefit to themselves or their heirs, and receive potentially substantial savings in income, estate or gift taxes.

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The CPA adviser should be able to discuss not only which type of charitable trust is most suitable for clients but also should know these trusts' impact on income and transfer taxes (see Exhibit 1). This article discusses two main types of charitable trusts, charitable remainder trusts (CRTs) and charitable lead trusts (CLTs); describes the advantages of each; and discusses which to use and when, based on your clients' goals. This article also focuses on a relatively new planning device called the increasing payment charitable lead annuity trust (IPCLAT).

CHARITABLE REMAINDER TRUSTS

A CRT provides an annual stream of payments to one or more noncharitable beneficiaries for a term of years with an irrevocable remainder interest to be transferred to charity There are two types: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). A CRAT pays a fixed amount each year to the noncharitable beneficiaries, while the CRUT's annual payments are based on a fixed percentage of the fair market value (FMV) of the trust's assets, valued annually. In either case, the noncharitable beneficiaries could be the donor or the donor's spouse or children.

The Internal Revenue Code provides a number of statutory requirements for CRTs. For example, the annual annuity must be at least 5% but no more than 50% of the trust's assets. The trust's term may be fixed but can be no longer than 20 years, o1 it can be for the life of one or more noncharitable beneficiaries. A CRUT may provide for payment of the lesser of a fixed percentage of assets or the trust's income ("income only" CRUT). A CRUT can also provide net income only with a makeup provision. …