Charitable Planned Giving

Debra Scott, JD, MPH
The Scott Practice, LLC
Charitable Trusts

Charitable Split Interest Trusts
Charitable Lead Trusts
Charitable Remainder Trusts of text goes
here
Charitable Planning Considerations line of
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The Scott Practice, LLC Copyright 2014 All rights reserved
Not Considered Legal Advice
Presentation Agenda

WHAT IS A CHARITABLE SPLIT-
INTEREST TRUST?
Irrevocable trust arrangement funded by a donor
where the interests in the trust are divided
between at least one non-charity beneficiary and
a qualifying charity.

WHAT IS A CHARITABLE SPLIT-
INTEREST TRUST?
Charitable Lead Trust - is an irrevocable trust arrangement
funded by a donor which provides periodic distributions to a
charity, followed by a final distribution to a non-charitable
beneficiary.
Charitable Remainder Trust - is an irrevocable trust
arrangement funded by a donor which provides periodic
distributions to a non-charitable beneficiary, followed by a
final distribution to a charity.

CHARITABLE LEAD TRUST
A Charitable Lead Trust (CLT) allows a donor to provide a significant
contribution to charity with the potential to reduce or eliminate gift or
estate taxation if properly structured.
A lead trust makes distributions to charity each year (the “lead interest”)
and then upon termination distributes its remaining assets to individuals.
As such, a charitable lead trust can be an excellent tool for a donor with
significant assets to make a large charitable gift, and also benefit his or
her descendants.

CHARITABLE LEAD TRUST
Currently, CLTs have grown in popularity among estate planners because
of the Applicable Federal Rate (AFR) continues to be at a historical low 2
percent.
A low AFR means a higher gift or estate tax charitable deduction, which
translates into the potential for a wealthy donor to ultimately pass more
assets to descendants free of gift and estate taxation.
Also, CLTs have no minimum or maximum payout requirements, unlike
charitable remainder trust which require a five percent minimum and fifty
percent maximum payout.

Grantor versus Non-Grantor CLTs
 Creates present
interest to
charity and a
remainder
interest to the
donor.
 Creates present
interest to
charity and a
remainder
interest to
donor’s
beneficiary
Grantor CLT Non-Grantor CLT
The
distinction
between the
two forms of
trust is
critical.

Grantor versus Non-Grantor
CLTs
A CLT is not considered a tax-exempt entity for tax
purposes. The taxability of a CLT is based on
whether the trust is a grantor or non-grantor trust.
If the provisions of the trust qualifies the trust as a
“grantor trust” for tax purposes, then the donor will
be taxed on all earned trust taxable income during
the period trust disbursements are made to the
named charity.

CLTsThe donor is entitled to an income tax deduction
only at the time of funding.
No income tax deduction is allowed for the
annual payments from the trust to the named
charity.
As a result, the income tax benefit the donor
received at the time of funding may be eroded
over time because of annual recognition of income

CLTs
On the other hand, an income tax charitable deduction under
section 642( c)(1) is available each year for non-grantor CLT.
Hence, any taxable income earned by the trust can be offset
by the charitable deduction available for the annual amount
distributed to charity.
This can result in the lead trust owning no income tax. A
trade off is that the donor does not receive an income tax
charitable deduction at the time of funding or anytime
thereafter. However, because it is a non-grantor trust, the
donor does not report the trust’s earned income.

Two Types of CLTs
 an annuity
payment is
distributed to
charity,
established at the
time of trust
funding.
 the payment
amount is a
predetermined
percentage of the
trust’s value and
is revalued each
year.
Charitable Lead Annuity
Trust
Charitable Lead Unitrust
The
distinction
between the
two forms of
trust is
critical.

Two Types of CLTs
Both trusts are irrevocable – thus upon funding the trust, the
grantor removes assets funding the trust from his or her
gross estate for gift and estate tax purposes.
Again, there is a significant planning distinction between the
type of payment charity receives – annuity versus unitrust.

Two Types of CLTs
How Taxable Gift Transfer Calculated:
An inter vivos CLT earns a gift tax deduction for the
present value of the payments to the charity. The
taxable gift from the donor is equal to the difference
between the present value (of the annuity/unitrust
payments) and the funding amount of the trust.
Funding amount – present value of annuity/unitrust
(gift tax charitable deduction) = Taxable Gift

Two Types of CLTs
The goal in structuring the CLT is to avoid to
the greatest extent allowable gift taxes.
Thus, we want the present value of the
annuity payment to be as large as possible so
that we potentially can move the greatest
amount to the donor’s beneficiaries tax free.

Two Types of CLTs
Only a CRAT can be structured so that the present
value of the annuity payments to the charity is equal to
the property funding the CLAT.
The annuity payment are precisely calculated so that
the present value of such payments exactly equals the
value of the assets originally funding the trust.
This is referred to as a 100 percent deduction CLAT or
a “zero-out” CLAT.

Two Types of CLTs
Gift Amount Gift Date and AFR Term of Years Payment to Charity Initial Percentage
$2,000,000
7/17/2014
AFR 2.2% 20Annual 6.24%
(A)
Annual Annuity
Amount $124,700
(B)
IRS Factor Pub 1457
Table B x Feq Adj 1x 16.0402
(C ) Payout Feq Adj 16.0402
(D)
Present Value of
Annuity (C )x(A) ~ $2,000,000
(E)
Initial Funding
Amount $2,000,000
(F) Taxable Gift (E)-(D) $0

Two Types of CLTs
In a low interest rate environment, a CLAT is an
excellent vehicle for charitable gifts for the right donor.
However, in a high interest rate environment, less or
possibly nothing may ultimately pass to non-charitable
beneficiaries if a CLAT is structured.
CLUTs are generally not sensitivity to interest rates so
they are used most often in a high interest rate
environment.

Two Types of CLTs
Also, if the donor has remaining lifetime gift
tax exemption, then the CLAT can be
structured to receive a less than 100%
charitable gift tax deduction.
This will result in more funds within the CLAT,
with a greater probability of assets remaining
for non-charitable beneficiaries on termination
of the CLAT.

Step CLATs & Shark Fin Trusts
 amount of the
annuity
uniformly
escalates during
the annuity
term.
 trust makes
small payments
each year to the
charity and then
a final balloon
payment
Step CLATs Shark Fin Trust
These two
trusts are
considered
more
aggressive
charitable
planning

Step CLATs & Shark Fin
Trusts
The standard CLAT is a straight-line annuity
payment, where the amount of the annuity does
not change during the annuity term.
The disadvantage of a straight annuity is that
each year the rate of return on trust assets
generally must outperform the annuity amount in
order for there to be a healthy amount remaining
for beneficiaries.

Trusts
However, if the charity receives a lower amount at the
beginning of the trust term with escalating payments,
there is a higher earning potential for the trust overall.
The Internal Revenue Service (IRS) has provided
some guidance on structuring a CLAT such that the
payments to charity begin small but increase each year
by a certain percentage.

Trusts
Under Private Letter Ruling 201216045 found at
http://www.irs.gov/pub/irs-wd/1216045.pdf - the IRS allowed
a variable ascending annuity payments and stated that such
payments “satisfied the requirements of Section 2055(e)(2)
for a guaranteed annuity interest.”
Under PLR 201216045, the testator created a 10-year
testamentary lead annuity trust with annuity payments to
charity that increased twenty percent per year.

Trusts
The idea of the Shark Fin to defer
distributions for the greatest period possible
in order to maximize performance of the trust.
A shark fin lead trust generally is known to
outperform standard straight annuity CLATs.

Charitable Remainder Trusts
A charitable remainder trust (CRT) is essentially the
opposite of a charitable lead trust (CLT) in that the
annuity or unitrust payments are first made to a non-
charitable beneficiary with the remainder interest
distributed to charity.

Charitable Remainder Trusts
However, unlike a CLT, there is a minimum payout requirement
of 5 percent with respect to the annuity or unitrust payments and
a maximum requirement of 50%.
There is also a 20 year term limitation for CRTs, but there is no
such requirement for CLTs.
Similar to CLTs, the annual payout to the non-charity beneficiary
is either in the form of an annuity payment or unitrust payment.

CRATs
CRAT- a trust arrangement where a fixed sum (not less
than 5 percent of the initial trust value) is paid to one or
more persons at least annually for a term of years not
to exceed twenty years or for the life or lives of the
non-charity beneficiary or beneficiaries.
A key distinction with respect to a CRAT is that the
annuity percentage is fixed and with level payments
exclusive of trust performance. Also, additional
contributions to the CRAT is not permitted.

CRUTs
CRUT – a trust arrangement where trust distributions
are made on a periodic basis not less than annually
which equal at least 5 percent of the net fair market
value of the trust assets, valued annually. Additional
contributions to the CRUT are permitted.
Under a standard CRUT, when income and gain is not
sufficient to meet the required unitrust payment, the
trustee is required to distribute principal to make up the
difference.

Net Income Option
A CRUT can be structured as a Net Income
CRUT. Under this type of arrangement, the
trustee can pay the lesser of the full unitrust
amount and trust income.
What is essential here is how the trust and
state law define trust income.

Net Income Option
The IRS has stated under Reg. Section
1.643(b)-1, that “any trust which departs
fundamentally from concepts of local law in
the determination of what constitutes income
are not recognized for federal tax purposes.”
Therefore, it is important that the trust
document’s terminology regarding trust
income is consistent with state law.

Net Income Unitrust with
Make-upA step beyond the Net Income Unitrust is the NIMCRAT.
Under this arrangement, the trustee is directed to make-up
past deficiencies from prior years by distributing the excess
income earned in the current year.
Thus the trustee pays trust income in excess of that year’s
full unitrust amount if the aggregate of amounts paid in prior
years is less than the aggregate unitrust amount in prior
years.
Unitrust Amount in Prior Year – Amount Paid in Prior Year =
Difference can be Made Up

FLIP Unitrust
IRS regulations allow the trust instrument to pride a
one-time conversion from one of the income
exception methods to the standard CRUT method
upon a triggering event such as the sale of an illiquid
or unmarketable asset.
Unmarketable assets are defined as assets other
than cash, cash equivalents, or marketable
securities.

Planning Considerations
Because CRAT requires a fixed distribution with no
ability to make additional contributions to the trust, it is
less flexible than a CRUT.
If the CRAT is funded with assets with wide
fluctuations in value, it may be difficult to recover for a
loss of principal under a CRAT because payments are
fixed, potentially creating a higher reduction in
principal.

The annuity structure is generally best for low
risk assets and for persons with a short
investment horizon.
Unitrust are best if the assets used to fund the
trust are illiquid non-income producing assets
because the trust can be structured as a Net
Income Only trust.

NIMCRUT- the trustee is not obligated to make
distributions when trust cash flow is insufficient to
meet the unitrust payout.
If the return on investment outperforms the unitrust
payout from year to year, then the trust principal has
time to appreciate and can potentially payout larger
unitrust amounts to the non-charity beneficiary in
later years.

Thank you
For Questions Please
Contact
Debra Scott, JD, MPH
The Scott Practice, LLC
debra@scottpractice.com

Charitable Planned Giving

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