To learn more call or visit cancer.org / npan Charitable Remainder Trusts (CRTs): Back to the Future A Donor creates a trust, in which

Transcription

1 CHARITABLE REMAINDER TRUSTS (CRTs): BACK TO THE FUTURE AMERICAN CANCER SOCIETY WEBINAR OCTOBER 7, 2014 NOON EASTERN Lawrence Brody, JD, LLM Bryan Cave LLP St. Louis, MO Disclaimers The information and/or the materials provided as part of this program are intended and provided solely for informational and educational purposes. None of the information and/or materials provided as part of this power point or ancillary materials are not intended to be, nor should they be construed to be the basis of any investment, legal, tax or other professional advice. Under no circumstances should the audio, power point or other materials be considered to be, or used as independent legal, tax, investment or other professional advice. The discussions are general in nature and not person specific. Laws vary by state and are subject to constant change. Economic developments could dramatically alter the illustrations o r recommendations offered in the program or materials. This presentation is not intended to be an opinion and does not contain a full description of all facts or a complete exposition and analysis of all the relevant tax authorities. Information in this presentation was not intended or prepared to be used, and it cannot be used or relied upon by any party for the purposes of ( i ) avoiding any penalties that may be imposed on any taxpayer by any governmental authority or agency; (ii) promoting, marketing or recommending to any party any transaction or matter addressed herein; or (iii) making any investment decision. 1

2 To learn more call or visit cancer.org / npan Charitable Remainder Trusts (CRTs): Back to the Future A Donor creates a trust, in which an income interest is retained for the Donor and/or a member or members of his or her family (normally the spouse), for life (or a term of years up to 20), remainder to charity. 4 2

3 Charitable Remainder Trusts (CRTs): Back to the Future The charity's interest (determined under the IRS actuarial tables) qualifies for the income, gift and estate tax charitable deduction; the level of the income tax deduction d epends on the nature p ublic or private of the ultimate charitable beneficiary( i es). 5 Charitable Remainder Trusts (CRTs): Back to the Future The trust itself is tax- exempt and can be created either during life or at death. 6 3

4 Charitable Remainder Trusts (CRTs): Back to the Future The trust must be either in the form of an annuity trust (in which a fixed dollar amount is payable to the individual beneficiary( i es) each year) or a u nitrust (in which an amount equal to a fixed percentage of the value of the t rust assets d etermined each year is so payable); in any event the payout rate must be at least 5% and cannot exceed 50%. No other amounts can be paid to the individual beneficiary( i es). 7 Charitable Remainder Trusts (CRTs): Back to the Future In a u nitrust b ut not an annuity trust additions can be accepted and the payment can be limited to the lesser of trust income or the percentage rate (with or without a make- up provision). 8 4

5 Advantages 1. For lifetime trusts, assuming there is no pre- arranged sale (or sales agreement or option or maybe even any understanding) entered into by the Donor prior to the contribution, which the trust carries out, in the year of sale of contributed appreciated property, there is no capital gain when the trust sells such appreciated property contributed to the trust. 9 Advantages 2. As indicated, there are income, gift and estate tax charitable deductions for the actuarial value of the charity's interest; obviously, the income tax deduction is only available for lifetime gifts. 10 5

6 Advantages 3. If the Donor is the only income beneficiary, there are no gift or estate tax consequences resulting from the transfer. 11 Advantages 4. An annuity trust can protect the income beneficiary against a decline in principal; a u nitrust can protect against inflation. 12 6

7 Advantages Additional contributions can be made to a u nitrust, but n ot to an annuity trust an important distinction. 13 Advantages 5. A u nitrust (but not an annuity trust) can restrict distributions to the income beneficiary to the l ower of the u nitrust amount or the trust's fiduciary accounting income (an "income only" u nitrust). 14 7

8 Advantages 6. An income- only u nitrust (with such a make up provision), known as a NIMCRUT, may be used as a so- called "private pension plan", to which contributions are made during working years; the trust would be invested for growth during working years and repositioned for income production at retirement (with no tax resulting from the sale of the "growth" investments). 15 Advantages These are sometimes called spigot trusts, because of the trustee s ability to turn the income of the trust on and off, by changing trust investments. 16 8

9 Advantages 7. The Donor can act as the trustee of the trust, retaining some measure of control over the trust assets, unless having the Donor act as trustee would cause the trust to be a grantor trust for income tax purposes (such as where the trustee has the power to "sprinkle" the trust's required u nitrust or annuity payments among the individual beneficiaries). 17 Advantages 8. The charitable remainder beneficiary can be the Donor s private foundation, allowing additional control over the ultimate gift to charity. 18 9

10 Advantages 9. As noted, the Donor (or the trustee) can retain the right to change the charitable remainder beneficiary( i es) at any time (or from time to time); as also noted, the Donor can retain the right to revoke any subsequent beneficiary's interest in the trust. 19 Advantages 10. T he use of life insurance on the life of the Donor owned by and payable to a joint life u nitrust (for the Donor and his or her spouse) can allow a partial income tax deduction for the insurance premiums and an increased u nitrust amount for the survivor (based on the death proceeds)

11 Advantages 11. A u nitrust can be used as the death benefit beneficiary of qualified plan or IRA benefits (or other items of income in respect of a decedent), to avoid paying the income tax on their inherent, built- in taxable income. 21 Disadvantages 1. The amounts received from the charitable remainder trust will produce taxable income (of some sort) for the beneficiary( i es), under the tier system of accounting ( W IFO" worst in, first out) required for charitable remainder trusts

12 Disadvantages 2. The income tax deduction for a lifetime gift to the charitable trust will be subject to the normal limits on the deduction to 30% (or in some cases 50%) of (essentially) gross income (with a 5 year carryover), unless a private foundation is a p ossible remainder beneficiary, in which case the private foundation deduction limitations would apply. 23 Disadvantages 3. No encroachments for individual beneficiaries are possible from the charitable trust, even for need; this is perhaps the most important potential disadvantage of such a trust

13 Disadvantages 4. The trust principal is lost to the Donor's family. 25 Disadvantages 5. Some assets are not suitable for gifts to such trusts; encumbered property may not be transferred to the trust, the trust may not own S Corporation stock, and, as indicated, some "special" assets aren't appropriate

14 Disadvantages 6. For young income beneficiaries (or multiple beneficiaries), the charitable deductions are limited; trusts for those types of beneficiaries would have trouble qualifying under the 10% minimum interest rules of TRA 97, even at the 5% minimum payout rate. 27 Disadvantages 7. This is an especially complex, irrevocable arrangement, with detailed drafting requirements

15 Disadvantages 8. T he trust is inflexible except for the effect of appreciation in principal and the resultant increase in the u nitrust amount from such a trust (and, if applicable, the effect of a "make up" provision in such a trust); again, no encroachments are possible. 29 Disadvantages 9. The minimum payout 50%. rate is 5%; the maximum rate is 30 15

16 Disadvantages 10. For annuity trusts, but not u nitrusts, the trust will fail to qualify if there is more than a 5% probability that the trust principal will be exhausted prior to distribution to the charity by making the required annuity payments. 31 Disadvantages 11. Many of the private foundation prohibited transaction rules applicable to private foundations apply to charitable remainder trusts

17 Disadvantages 12. As noted above, the IRS has announced that the use of a N IMCRUT as a spigot trust or as a private pension plan may violate the rule requiring the trust be operated solely for charitable purposes; what new rules will apply (if any) and when they would be applicable isn't clear. 33 Charitable Remainder Trust/ Irrevocable Life Insurance Trust In addition to a charitable remainder trust, as described above, the Donor also creates and funds an v irrevocable insurance trust, with members of his or her family as the ultimate beneficiaries, to "make up" for the value of the property transferred to charity

18 Charitable Remainder Trust/ Irrevocable Life Insurance Trust The charitable remainder trust use with the irrevocable insurance trust allows the Donor to "replace" for his or her family the assets going to charity (to "re- inherit" them) with an asset (the insurance) which would be outside of the Donor's estate for estate tax purposes; accordingly, the assets of neither trust would be subject to transfer tax. 35 Advantages 1. This combination provides the same advantages for the charitable remainder trust

19 Advantages 2. Properly structured, neither trust is includible in the Donor's estate; in some circumstances, subject to the possible application of the three year rule of Section 2035 for gifts of existing policies to the insurance trust. 37 Advantages 3. The income tax deduction benefits from the charitable deduction generated by the remainder trust (again, assuming they are available) and/or its income stream can be viewed as being available to "finance" the insurance premiums

20 Advantages 4. Gifts to the insurance trust are "leveraged", since they will allow the grantor/insured to move the insurance proceeds out of his or her estate (as well as that of a spouse) for estate tax purposes, at a gift tax cost based on the policy premiums. 39 Disadvantages 1. This combination retains the same disadvantages for the charitable remainder trust 40 20

21 Disadvantages 2. The life insurance must be beyond the Donor's control he or she may retain no ownership rights in the insurance or under the trust. 41 Disadvantages 3. There is also the complexity and expense of the creation and maintenance of two irrevocable trusts to consider

22 Disadvantages 4. Gifts to the insurance trust to allow the trustee to pay premiums will be gifts for gift tax (and, in appropriate case, G STT) purposes; note again the possible l everaging techniques described above. 43 CHARITABLE REMAINDER TRUSTS (CRTs): BACK TO THE FUTURE Thanks for joining us today! 22