A factor to consider is the Federal Estate and Gift tax exemption for 2020 is $11.58 million per individual, which means an individual can leave $11.58 million to heirs and pay no federal estate or gift tax. A married couple will be able to protect $23.16 million and the gift tax exclusion for 2020 is $15,000.
With the upcoming election and a possibility of policy changes resulting in tax reform, it is important to consider planning opportunities available to protect assets. One such planning opportunity available to individuals with charity in mind, can be achieved through the use of Charitable Lead Trusts.
A Charitable Lead Trust (CLT) defined in IRC Sec 17(F)(2)(B), is a split-interest trust in which a charity receives an income stream during the life of the trust and non-charitable beneficiaries receive the remaining assets when the trust terminates. The donor receives an immediate charitable contribution tax deduction while the assets held in the trust appreciate in value allowing the appreciation to be passed to the next generation free of estate taxes. There are a few options for trusts that can be set up and considered during these economic conditions. (hyperlinked to https://www.withum.com/resources/lemons-to-lemonade-estate-planning-under-current-economic-conditions/) CLTs can be set up as Charitable Lead Annuity Trusts (CLAT) or Charitable Lead Unitrusts (CLUT). Trusts set up as CLATs make an annuity payment i.e. a fixed dollar amount determined annually to the charity while trusts set up as CLUTs make unitrust payments i.e. a fixed percentage of the fair market value of the trust’s assets, determined annually, to a charity.
CLT’s are irrevocable trusts that can be either grantor lead trusts or non-grantor lead trusts, each of which achieve different tax benefits.
Grantor CLT: The donor retains one or more powers over the trust therefore, is considered to be the owner of the income for income tax purposes. The grantor pays tax on the income generated by the trust assets. The grantor gets an income tax charitable deduction for the present value of the annuity or unitrust interest at the time assets are transferred, without causing the trust assets to be included in his/her gross estate. Transfers to a grantor CLT do not qualify for the annual gift exclusion because the gift of the remainder interest to the non-charitable beneficiaries is a gift of a future interest. One advantage of a grantor CLT is that the current deduction is applied against ordinary income tax rates while the trust assets may be invested in assets that produce income taxable at lower capital-gains tax rates.
Non-Grantor CLT: A donor does not retain a grantor trust power in a non-grantor CLT. The trust, not the donor receives an income tax charitable deduction when it makes the annuity or unitrust payments to the charity. The trust is taxed on any income generated by the trust assets. A non-grantor CLT does not generate any income tax charitable deduction to the donor, therefore is useful for individuals who have already made contributions up to their AGI limitation for the tax year, but wish to make additional contributions.
To determine whether setting up a CLT is the right strategy to meet your estate and charitable planning objectives, please reach out to a member of the Withum Tax Services Group.