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CRTs and CLTs offer dual beneficial interests

Charitable giving can provide many intangible benefits to you and your family, which can be as rewarding as the estate tax savings that can result from your donations. To help achieve your philanthropic and estate planning goals, consider a charitable remainder trust (CRT) or a charitable lead trust (CLT).

These "split-interest" trusts – so-called because of their dual beneficial interests – provide for both qualified charities and noncharitable beneficiaries, such as you or your loved ones.

CRT strategies

A CRT provides noncharitable beneficiaries with exclusive rights to all distributions until their interests have terminated. At that time, charitable beneficiaries receive the remainder – the assets left over in the trust.

A CRT can be a useful tool if you'd like to divest yourself of a highly appreciated asset to diversify your portfolio but are concerned about the capital gains tax.

A CRT can be a particularly useful tool if you'd like to divest yourself of a highly appreciated asset to diversify your portfolio but are concerned about the capital gains tax. You create a CRT, name yourself the noncharitable beneficiary and transfer the appreciated asset to the trust. Then, the CRT can sell the asset (tax-free because the CRT is tax-exempt) and use the proceeds to purchase diverse, income-producing, assets.

You receive annual payments from the trust for your lifetime, increasing your cash flow. A portion of each payment may be taxable to you, depending on the trust's activity. You might, for instance, have capital gains income attributable to the sale of the highly appreciated shares you transferred to the trust. The gain that you report – and the related tax consequences of the gain – will be spread out as you receive payments.

In addition, you'll enjoy an immediate income tax deduction on creation of the trust, calculated as the present value of the charity's remainder interest. You also can gain recognition within the charitable organization(s) and community as a result of the contribution, unless you prefer to donate anonymously.

And don't forget to consider the estate tax implications: At your death, the trust terminates, and the remaining assets belong to the charity. These assets won't be included in your estate for estate tax purposes.

If you're concerned that, should you die early in the CRT's existence (before you've received many payments from it), there won't be enough assets in your estate for your heirs to receive the inheritances you intended, there are two potential solutions.

1. You can set the CRT term for a specific number of years (rather than your lifetime) and name your heirs as contingent beneficiaries. Then, regardless of whether you live for one day or the entire term, you'll know that your loved ones will be provided for. That is, either you or your heirs will receive the annual distributions for the whole term.

2. You can hedge your bets by purchasing a life insurance policy to make up for the shortfall your heirs might experience. You'll want to do an analysis of how much insurance you'll need, as well as how long you'll need it. Typically, this insurance policy should be held in an irrevocable trust, so the insurance proceeds won't be included in your estate for estate tax purposes.

CLT strategies

A CLT reverses the timing of when the charitable and noncharitable beneficiaries receive distributions: The charitable beneficiaries receive the initial distributions and the noncharitable beneficiaries receive the remainder.

A CLT can be useful when an asset generates substantial income every year, you don't need the income and you wish to eventually pass the asset to your heirs. The CLT generates an income stream for the charity during the trust term, and at your death (or the end of the CLT term, if you've set it for a specific number of years) the asset passes to your family.

A CLT works similarly to a CRT in that you're able to get an immediate income tax deduction on the transfer of assets into the trust. In subsequent years, however, the income generated by the CLT is taxable to you. Unlike a CRT, though, a CLT has a gift tax component, which is calculated as the present value of the noncharitable beneficiary's remainder interest.

As with CRTs, CLTs can also be funded at your death, but the tax consequences will be different.

Which trust is better for you?

Giving to your favorite charitable organizations is important to you, but you also want to provide for your family. Including a CRT or CLT in your estate plan can help you achieve your goals.
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