Freedom and Estate Planning
Estate planning is a deeply personal process through which we decide how we share our wealth and define our legacy. One of the expressions of these choices is the selection of a beneficiary. Common beneficiaries of an estate plan include spouses, children, or other family and friends. For an individual who would also like to include a charity as a beneficiary, utilizing a tool like a split-interest trust may be a strategy to consider. In this space, we explore two strategies one can implement.
What is a Split-Interest Trust?
A split-interest trust allows an individual to split the financial interest of their trust between two beneficiaries. Using this tool also empowers a person to decide the order of the transfer of their estate, typically between a charity and a friend or family member. Below, we describe two tools that can achieve these goals in different ways.
Charitable Lead Trusts
Charitable Lead Trusts (CLT) act in the manner of their title. After funding the trust, the donor first directs distributions to a charity, delaying the distributions to their other beneficiaries. There is no limit on the amount of time a CLT can remain in effect, but it must be in place for either a fixed term or until the death of the donor.
If this type of trust is established before the donor’s death, the trust’s annual income tax liability is reduced through ongoing its charitable contributions. If established at the donor’s death, then their taxable estate is reduced by the deductible amount of the amounts given to charity. After a predetermined number of years has passed and the charity of choice has received their benefits, the assets that are passed to the non-charitable beneficiaries are not subject the federal estate tax.
Charitable Remainder Trusts
Charitable Remainder Trusts (CRT) enable the donor to pass along wealth almost in the same tax efficient manner as the Charitable Lead Trusts, except the order of beneficiaries is reversed. A CRT first pays the other beneficiaries (in some cases, the donors) for a predetermined amount of time before eventually directing the rest of the estate to charity. The CRT can make distributions to the non-charitable beneficiaries for their lifetime or for a fixed term (not exceeding 20 years).
After the non-charitable beneficiaries have received their shares, the donor can claim an income tax deduction for his or her donation to the charity. This tool can also be used to reduce federal estate taxes.
If you have questions about how these strategies are implemented as part of a financial plan, please contact a member of Yeske Buie’s Financial Planning Team.
- Anderson, Suan. Comparing Split-Interest Charitable Trusts. https://www.onefpa.org/journal/Pages/Comparing%20Split-Interest%20Charitable%20Trusts.aspx
- Using Trusts to Maximize Charitable Giving While Minimizing Estate Taxes – Fee-Only Financial Planner in Boston and Cambridge, MA: Fisher Financial Strategies. 01 Feb. 1970. 14 June 2019 <http://www.ffscambridge.com/resources/article/using-trusts-to-maximize-charitable-giving-while-minimizing-estate-taxes>.
- What is a Charitable Split-Interest Trust? EstatePlanners.com. March 7, 2011. http://www.estateplanners.com/articles/what-is-a-charitable-split-interest-trust-2/