Charitable Strategies in Estate Planning
Direct Contributions to Charities
Charitable Remainder Trusts (CRTs)
There are two types of CRTs:
- CRATs (Charitable Remainder Annuity Trusts) give a fixed annuity yearly and do not allow additional contributions.
- CRUTs (Charitable Remainder Unitrusts) distribute a fixed percentage of the trust’s annually revalued assets and accept additional contributions.
Charitable Lead Trusts (CLTs)
CLTs can be:
- Charitable Lead Annuity Trust (CLAT): These offer a fixed annual sum to charity; no further contributions are accepted.
- Charitable Lead Unitrust (CLUT): Distributes a set percentage of the annually assessed trust assets and accepts additional contributions.
CLT Taxation
How a CLT is taxed depends significantly on the status of the grantor in the trust. The CLT can be either a Grantor or Non-Grantor CLT.
A Non-Grantor Charitable Lead Trust is a type of CLT where the trust itself, not the person who creates it (the grantor), is considered the owner of the assets. The grantor does not receive an income tax deduction for the assets placed in the trust. Instead, the trust itself can take a charitable deduction for its payments to the charity. Since the trust owns the assets, it is also responsible for paying any taxes on its income.
Upon the termination of the trust’s term, the remaining assets are passed to the beneficiaries, which could be the grantor’s heirs. At this point, because the assets have been outside the grantor’s estate, the transfer to the beneficiaries may be subject to little or no estate or gift taxes, depending on the initial structure of the trust and the total amount of the gift.
A Grantor Charitable Lead Trust is a type of CLT where the individual who sets up the trust (the grantor) retains tax responsibilities. Upon donating assets, the grantor receives an immediate income tax deduction for the present value of the future payments that will be made to the charity. However, the grantor is responsible for paying income taxes on any earnings the trust generates during its term.
This type of trust is often used when the grantor desires an upfront tax benefit and hopes to be in a lower tax bracket when the trust’s earnings are taxed. After the trust’s term ends, the remaining assets typically revert back to the grantor.
Donor-Advised Funds (DAFs)
A DAF is an investment account that is usually operated by a public charity. By contributing to a DAF, you receive an immediate tax deduction and enjoy an advisory role as to how your donations are invested and donated. This is especially useful if you haven’t chosen a charity to donate to yet, but would like the tax deduction now.
Contributions to DAFs allow for tax deductions up to 60% of your AGI for cash and 30% for long-term appreciated assets. Restrictions do apply to DAFs – specifically, you cannot use a DAF donation as a Qualified Charitable Distribution (QCD), and you cannot personally gain from any grands made by the DAF, such as paying for a grandchild’s tuition.
Charitable Gift Annuities in Retirement Strategy
Life Insurance in Estate Planning (and Your Gifting Strategy)
Life Insurance as a Gift or Donation
Gifting a life insurance policy directly can potentially be a tax-savvy move. By transferring ownership of a policy to a beneficiary, you remove the policy’s value from your estate and provide a possibly significant tax-advantaged gift. The gift may count against your lifetime tax exemption limit, so it may make sense to give it away if you foresee its growth eventually pushing you over the estate tax exemption limit.
Plus, a portion of it may be excluded from your taxes by the Annual Gift Tax Exclusion if you haven’t utilized it for the year already. If you’d rather not see the disappointed look on your grandchild’s face, you can possibly even donate your policy to a charity – if they’ll take it, as they would also be taking on the administrative responsibilities associated with it.
Irrevocable Life Insurance Trusts (ILITs)
Final Thoughts
As the year ends and TCJA’s sunset draws near, those with sizeable estates should reassess their estate planning strategies. Gifting away your wealth is a relatively straightforward strategy that your family members will certainly appreciate, while charitable strategies serve to not only reduce your taxable estate but also help establish your legacy and how you want to be remembered.
If you’d like to see how CPA Retirement Solutions can help find the optimal solution for you, feel free to reach out by clicking the button below.
