Aaron Charles Gregg

How Does a Charitable Trust Help with Estate Planning?

“In general, the best reason to establish a charitable trust, is if you would like to create a long-standing form of charitable giving.”

Simply put, a charitable trust holds assets and distributes assets to charitable organizations. The person who creates the trust, the grantor, decides how the trust will manage and invest assets, as well as how and when donations are made, as described in the article “How a Charitable Trust Works” from yahoo! finance. An experienced estate planning attorney can help you create a charitable trust to achieve your estate planning goals and create tax-savings opportunities.

Any trust is a legal entity, legally separate from you, even if you are the grantor and a trustee. The trust owns its assets, pays taxes and requires management. The charitable trust is created with the specific goal of charitable giving, during and after your lifetime. Many people use charitable trusts to create ongoing gifts, since this type of trust grows and continues to make donations over extended periods of time.

Sometimes charitable trusts are used to manage real estate or other types of property. Let’s say you have a home you’d like to see used as a community resource after you die. A charitable trust would be set up and the home placed in it. Upon your death, the home would transfer to the charitable organization you’ve named in the trust. The terms of the trust will direct how the home is to be used. Bear in mind while this is possible, most charities prefer to receive cash or stock assets, rather than real estate.

The IRS defines a charitable trust as a non-exempt trust, where all of the unexpired interests are dedicated to one or more charitable purposes, and for which a charitable contribution deduction is allowed under a specific section of the Internal Revenue Code. The charitable trust is treated like a private foundation, unless it meets the requirements for one of the exclusions making it a public charity.

There are two main kinds of charitable trusts. One is a Charitable Remainder Trust, used mostly to make distributions to the grantor or other beneficiaries. After distributions are made, any remaining funds are donated to charity. The CRT may distribute its principal, income, or both. You could also set up a CRT to invest and manage money and distribute only earnings from the investments. A CRT can also be set up to distribute all holdings over time, eventually emptying all accounts. The CRT is typically used to distribute proceeds of investments to named beneficiaries, then distribute its principal to charity after a certain number of years.

The Charitable Lead Trust (CLT) distributes assets to charity for a defined amount of time, and at the end of the term, any remaining assets are distributed to beneficiaries. The grantor may be included as one of the trust’s beneficiaries, known as a “Reversionary Trust.”

All Charitable Trusts are irrevocable, so assets may not be taken back by the grantor. To qualify, the trust may only donate to charities recognized by the IRS.

An estate planning attorney will know how to structure the charitable trust to maximize its tax-savings potential. Depending upon how it is structured, a CT can also impact capital gains taxes.

Reference: yahoo! finance (Dec. 16, 2021) “How a Charitable Trust Works”

Why Do People Give to Charities at End of Year?

“With a draft bill from the House Ways and Means Committee on the table, all signs suggest that higher income taxes could be right around the corner. How they will affect charitable giving remains to be seen.”

The landscape for charitable giving has undergone a lot of change in recent years. More changes are likely around the corner. This year, a more intentional approach to year-end giving may be needed, according to the article “How to Make the most of Year-End Charitable Giving” from Wealth Management.

From the continuing pandemic to natural and humanitarian disasters, the need for relief is pressing on many sides. Donors with experience in philanthropy understand charitable giving as part of a tax strategy, part of providing the essential support needed by non-profits to keep operating and respond to emergencies and, at the same time, ensure their charitable dollars are aligned with their family values and missions.

For the tax perspective, changes resulting from the Tax Cuts and Jobs Act of 2017 left many nonprofits harshly impacted by the doubling of the standard deduction, which gave fewer people a financial incentive to donate. The question now is, could the latest round of proposed changes spur greater giving?

Amid all of these changes, sound and stable giving strategies remain the wisest option.

The CARES Act encouraged individual giving during times of hardship, and tax breaks were extended in 2021. However, certain incentives are now closing, such as the ability to deduct up to 100% of adjusted gross income for cash gifts made directly to public charities.

The Build Back Better Agenda proposes increasing the long-term capital gains tax rate for individuals with more than $400,000 of taxable income, and married couples filing jointly with more than $450,000 of taxable income, to 25%, plus a 3% surcharge to income of more than $5 million. This would make charitable giving more attractive from an income tax perspective. However, this bill has yet to be passed.

Consider the following strategies:

Qualified charitable distributions. RMDs must be taken in 2021. For donors taking a standard deduction, a qualified charitable distribution is a possible option. If you are 70½ and over, you can donate up to $100,000 from an IRA. This satisfies the RMD, as long as the gift goes directly to a charity, not to a Donor Advised Fund.

Contributions of appreciated stock. To make charitable gifts in the most tax-efficient way possible, a donation of appreciated stock is a smart move. Donors receive a charitable income tax deduction (subject to AGI limitations) and avoid capital gains tax.

Charitable bequests. The uncertainty around income tax reform includes estate taxes, and pro-active individuals are now reviewing their estate plans with their estate planning attorneys.

Funding a Donor Advised Fund (DAF). A DAF allows donors to contribute assets to a tax-free investment account, from which they can direct gifts to the charities of their choice. The contribution to the fund provides the donor with a charitable income tax deduction in the year it’s made.

Reference: Wealth Management (Oct. 11, 2021) “How to Make the most of Year-End Charitable Giving”

Checklist for Estate Plan’s Success

“Every so often, it’s smart to methodically go through your estate planning documents and see if any tweaks are needed. Here’s a checklist to guide you through that mission.”

We know why estate planning for your assets, family and legacy falls through the cracks. It’s not the thing a new parent wants to think about while cuddling a newborn, or a grandparent wants to think about as they prepare for a family get-together. However, this is an important thing to take care of, advises a recent article from Kiplinger titled “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

Every four years, or every time a trigger event occurs—birth, death, marriage, divorce, relocation—the estate plan needs to be reviewed. Reviewing an estate plan is a relatively straightforward matter and neglecting it could lead to undoing strategic tax plans and unnecessary costs.

Moving to a new state? Estate laws are different from state to state, so what works in one state may not be considered valid in another. You’ll also want to update your address, and make sure that family and advisors know where your last will can be found in your new home.

Changes in the law. The last five years have seen an inordinate number of changes to laws that impact retirement accounts and taxes. One big example is the SECURE Act, which eliminated the Stretch IRA, requiring heirs to empty inherited IRA accounts in ten years, instead of over their lifetimes. A strategy that worked great a few years ago no longer works. However, there are other means of protecting your heirs and retirement accounts.

Do you have a Power of Attorney? A POA gives a person you authorize the ability to manage your financial, business, personal and legal affairs, if you become incapacitated. If the POA is old, a bank or investment company may balk at allowing your representative to act on your behalf. If you have one, make sure it’s up to date and the person you named is still the person you want. If you need to make a change, it’s very important that you put it in writing and notify the proper parties.

Health Care Power of Attorney needs to be updated as well. Marriage does not automatically authorize your spouse to speak with doctors, obtain medical records or make medical decisions on your behalf. If you have strong opinions about what procedures you do and do not want, the Health Care POA can document your wishes.

Last Will and Testament is Essential. Your last will needs regular review throughout your lifetime. Has the person you named as an executor four years ago remained in your life, or moved to another state? A last will also names an executor for your property and a guardian for minor children. It also needs to have trust provisions to pay for your children’s upbringing and to protect their inheritance.

Speaking of Trusts. If your estate plan includes trusts, review trustee and successor appointments to be sure they are still appropriate. You should also check on estate and inheritance taxes to ensure that the estate will be able to cover these costs. If you have an irrevocable trust, confirm that the trustee is still ready and able to carry out the duties, including administration, management and tax returns.

Gifting in the Estate Plan. Laws concerning charitable giving also change, so be sure your gifting strategies are still appropriate for your estate. An estate plan review is also a good time to review the organizations you wish to support.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

How are Charitable Contributions Used to Reduce Estate Taxes?

“The wealthy are facing a rise in taxes. Charitable donations are a way to reduce exposure, while giving back. Among these vehicles are charitable remainder trusts and donor-advised funds.”

Increasing tax changes for the wealthy are coming, and motivation to find ways to protect the wealth is getting increased attention, according to a recent article from CNBC entitled “Here’s how to reduce exposure to tax increases with charitable contributions.” Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined. The CRT is complicated, requiring estate planning attorneys to create them and accountants to maintain them. The DAF is simpler, less expensive and is growing in popularity.

Both enable income tax deductions, in the current year or carried forward for five years, on cash contributions of up to 60% of the donors’ AGI and up to 30% of AGI on contributed assets. These contributions also reduce the size of taxable estates.

CRTs funnel asset income into a tax-advantaged cash stream that goes to the donor or another designated non-charitable beneficiary. The income stream flows for a set term or, if desired, for the lifetime of the non-charitable beneficiary. The trusts must be designed, so that at the end of the term, at least 10% of the funds remain to be donated to a charity, which must be designated at the outset.

No tax is due on proceeds from the sale of trust assets, until the cash makes its way to the non-charitable beneficiary. When assets are held by individuals, their sale creates capital gains tax in the year they are sold.

CRT donors can fund the trusts with highly appreciated assets, then manage them for optimal returns while minimizing tax exposure by adjusting the income stream to spread the tax burden over an extended period of time. If capital gains tax rates are raised by Congress, this would be even better for high earners.

DAFs do not allow dispersals to non-charitable beneficiaries. All gains must ultimately be donated to charity. However, the DAF provides advantages. They are easy to create and can be set up with most large financial service companies. Their cost is lower than CRTs, which have recurring fees for handling required IRS filings and trust management. Charges from financial institutions typically range from 0.1% to 1% annually, depending upon the size, and a custodial fee for holding the account.

DAFs can be created and funded by individuals or a family and receive a deduction that very same year. There is no hurry to name the charitable beneficiaries or direct donations. With a CRT, donors must name a charitable beneficiary when the trust is created. These elections are difficult to change in the future, since the CRT is an irrevocable trust. The DAF allows ongoing review of giving goals.

Funding a DAF can be done with as little as $5,000. The DAF contribution can include shares of privately owned businesses, collectibles, even cryptocurrency, as long as the valuation methods used for the assets meet IRS rules. Donors can get tax deductions without having to use cash, since a wide range of assets may be used.

The DAF is a good way for less wealthy individuals and families to qualify for itemizing tax deductions, rather than taking the standard deduction. DAF donations are deductible the year they are made, so filers may consolidate what may be normally two years’ worth of donations into a single year for tax purposes. This is a way of meeting the IRS threshold to qualify for itemizing deductions.

Which of these two works best depends upon your individual situation. With your estate planning attorney, you’ll want to determine how much of your wealth would benefit from this type of protection and how it would work with your overall estate plan.

Reference: CNBC (April 20, 201) “Here’s how to reduce exposure to tax increases with charitable contributions.”

Plan Your Charitable Giving in Your Estate Plan

Financial Planning’s recent article, “Charitable giving: It’s not just about taxes,” says that charitable giving is frequently considered a matter of tax planning. That includes pinpointing highly-appreciated assets to donate and perhaps creating a charitable remainder trust or a charitable lead trust. However, the issue of the estate tax has become less important for many,  since the federal estate tax exemption has increased ($5.49 million per individual in 2017). President Trump also spoke of repealing the estate tax, and only 18 states and DC still have an estate tax. Therefore, even state estate tax savings are less relevant for most donors.

For many years, planning a major gift would be based in no small part on maximizing the income and estate tax benefits of the donation.  However, donors may now want to consider the effect of a major gift on their future financial security.

This change in focus should mean more comprehensive financial forecasting to help you in structuring large donations, and more complex gift structures may be required.

A donor may want to commit certain dollars now and in the future, but might want to make other commitments that are contingent on his or her future financial condition. He or she may pay some of a charitable pledge now, some at a later date, and the remainder based upon a future event. This gives the donor added financial security.

In some instances, a donor planning a large charitable gift, will want to consider his or her long-term care needs into the plan, and long-term care insurance can be purchased as part of the charitable planning to give the donor a safety net.

Some retiring baby boomers believe that charity is about making a difference—and often they want to be actively involved in that process. Talk with your attorney about the many ways you can tailor a donation to meet a wide range of personal objectives. This can also entail writing an agreement with the charity that specifies the way in which the donation will be used. You can also add milestones when more donations will be made, like when the charity attains specific program goals.

As you age, you might want to involve a care manager with your planning to sketch out future medical costs and to be certain the financial model supports the gift.

There’s More to Estate Planning Than Just a Will

Speaking with an experienced estate planning attorney can mean less income taxes being owed by your estate. Despite the fact that the majority of estates currently won’t have an estate tax liability, most will have to pay income taxes. Many executors are surprised to find out that the top rate of 39.6% starts at just $12,300 of estate income!

The (Beckley, WV) Register-Herald’s recent article, “Estate planning beyond your will,” says that minimizing income taxes through better control of the transfer process and its timing is worth the time and effort.

Retirement fund accounts, like IRAs, life insurance, and annuities have beneficiaries listed to designate the person who will receive the funds after the owner’s death. In many instances, the beneficiary is the person’s estate (as a default), but anyone can be listed, including a charity or nonprofit organization.

If you want to update the beneficiary on these types of accounts or policies at any time, the company’s change of beneficiary form needs to be completed. Note that this doesn’t impact the current use of the account or policy. These accounts and policies are a great way to support a favorite nonprofit organization after you pass away, like the ALS Association to help fight Lou Gehrig's Disease.

When a nonprofit like the ALS Association is listed as the beneficiary, no income or estate taxes are owed by the estate, so more funds will be available for other uses. This makes using retirement fund accounts a wise choice for charitable gifts made through your estate. Affecting the transfer of these types of assets by use of a beneficiary form also lowers estate administration costs, and this typically means that the assets will be transferred more quickly to the recipient in a simpler process.

US savings bonds can also be used to benefit others as an estate gift. You can make a family member or friend the surviving beneficiary of one or more bonds with a form available from the U.S. Treasury. The future beneficiary doesn’t become a co-owner of the bond or have any control during the owner’s lifetime. Treasury Department rules don’t allow nonprofit organizations to be named surviving beneficiaries on savings bonds, but a gift provision included in a will can make a charitable gift of the bonds.

Getting to know how these different assets are controlled will help you become more savvy and efficient with your estate plans.

Reference: The (Beckley, WV) Register-Herald (November 23, 2016) “Estate planning beyond your will”