taxes

by Verena Meiser

Why Set Up a Trust to Handle a Charitable Donation?

The main reason is that the Grantor, the person setting up the trust, gets income tax, estate and gift tax benefits, while also allowing for the property to be invested in the trust for some period time before the trust terminates and everything is given to charity. While the trust is in existence, that Grantor or the Grantor’s family could benefit by getting distributions from the trust.

With regard to those distributions, there are two accepted methods for calculating them: they can be unitrust amounts or be handled as an annuity, and which of these methods will be followed is determined at the outset and drafted into the trust agreement. A unitrust amount would be a fixed percentage of the total value of the trust, as determined each year, and an annuity would be calculated based on the duration of the trust, which could be a term of years or the Grantor’s life expectancy. Strict rules for these calculations are laid out in Treasury Regulations to the tax code.

For these trusts to be successful, it is critical that the Trustee understands how to administer the trust while complying with these regulations. I would highly recommend an estate planning attorney, an appraiser, and an accountant be involved. The attorney would not only draft the trust agreement, but also advise during the administration, the appraiser would determine the value of the property at the time it is transferred to the trust, which is important since the calculation of distributions hinges on that initial value, and an accountant can calculate the tax deduction and prepare appropriate returns every year.

Charitable Remainder Trusts take a special place in the family of trusts we use for estate planning. They are tax exempt entities! That means that income generated in the trust, is not subject to income tax. That is why these trusts are attractive for Grantors who own appreciated assets or assets that may significantly appreciate in the future, since the sale within the trust would not be subject to capital gains taxes.

The annual distributions to beneficiaries, however, are subject to income tax. Do CRTs provide any other tax benefits? Yes, estate and gift tax benefits. If the person who receives distributions from the trust is the Grantor or the Grantor’s spouse, the initial transfer to the trust will not reduce the available estate tax exemption. When the Grantor dies, no estate tax is due, because the estate gets a charitable deduction for the remaining assets in the trust, as they all go to charity.

If the persons who receive distributions are others, such as the children, then a portion of the value of the property transferred to the trust will reduce the available estate tax exemption. However, the property would be forever removed from the Grantor’s estate, and neither the value of the property nor any further growth would add to the Grantor’s estate at death. While setting up a CRT may sound complicated, the right team of professionals can help smooth the process and help administer the trust year in and year out.

by Verena Meiser

Should you Consider a Spousal Lifetime Access Trust (SLAT)?

Change is coming to estate and gift tax laws. Should you consider a Spousal Lifetime Access Trust (a SLAT)?

You may be asking yourself what steps you could take in light of the anticipated reduction in the estate tax exemption and the possible limitation of the annual gift tax exclusion to a total of $20,000 per year per donor, meaning that you could not make more than a total of $20,000 of gifts that do not have to be reported. Gone would be the days of making $15,000 gifts to grandchildren every year, or large contributions to life insurance trusts with Crummey powers to pay for premiums. The anticipated changes will impact many existing estate plans. If yours may be affected, are there any planning strategies you should consider?

Estate planners have many tools at their disposition. I would like to describe one of those, since it is drawing a lot of interest at this time, due to the nature of the anticipated tax law changes. That powerful planning tool is a trust, that could be added to an existing estate plan to lock in the currently high estate tax exemption and, it could also provide the resources to cover insurance policy premiums in excess of $20,000 a year.

Let’s look at a Spousal Lifetime Access Trust.

It is an irrevocable Trust, set up by a Grantor for the benefit of the Grantor’s spouse. Assets are protected from the spouse’s creditors, the spouse can choose the investments and the trustees, and if the transfer to the trust is a complete transfer, the assets are not part of the taxable estate of either spouse. The idea is to fund such a trust with assets of a value up to the current estate tax exemption.

In the case of a married Grantor, the spouse is the beneficiary, and as such, the spouse could share distributed property with the Grantor in the event he or she runs out of assets. That gives a sense of comfort. For the unmarried Grantor, the trust could include provisions for a potential future spouse, often referred to as a “floating spouse”, and children could be named as beneficiaries.

Some other attractive features of a SLAT are that the Spouse could have a lifetime and a testamentary limited power of appointment; meaning that the spouse could appoint funds back to the Grantor. For those who have purchased life insurance in an Irrevocable Life Insurance Trust, to shelter the proceeds from estate taxes, any annual premiums in excess of the new $20,000 gift tax limit, could be paid for with trust property.

The bottomline is that a SLAT has the potential of providing significant estate and gift tax savings making it worthwhile to consider. We are here to advise and explore if a SLAT is a good fit for your family.