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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

A Primer on Complex Planned Giving Strategies for High-Net-Worth Taxpayers

In my article, "Thoughts on Year-End Giving", posted here December 23rd, I mentioned in passing three planned giving strategies that can yield truly outstanding tax savings in the right situations. This article will expound just a bit on each of those ideas.

Charitable Foundation Trust. High-net-worth individuals and families may create private foundations for making charitable donations that can go on for decades. While large initial donations are common, these trusts can be set up with as little as $10,000. 

Generally, upfront contributions are tax-deductible, but additional charitable contributions can be made to it in the future. Such a trust can allow clients to time their donations to get maximum tax savings, while payouts to selected charities and payments to family members or friends at fair market value for charitable work can follow at a more measured pace.

Many families enjoy using a private foundation in order to have community recognition, to facilitate charitable activities for specific individuals in need who are not related to the foundation donors, and to provide employment at reasonable compensation rates for family members and friends who may work for the foundation. Some taxpayers cause their foundation to be "active" as a private operating foundation so that the 50-percent-of-adjusted-gross-income-deduction limit and a number of the other rules that are applied more favorably for public charities can be used.

Charitable Lead Annuity Trust (CLAT). Some planned giving strategies involve donations with lots of zeroes attached (i.e., the six or seven-figure kind). While more upfront organization effort and expense might be necessary, the tax savings can be tremendous.

With a CLAT, for example, assets are donated to the trust and a fixed amount of assets will go to charity for a set number of years. At the end of the annuity term, what is left in the trust will pass to individual beneficiaries, often the trust creator's children, outright or in trust. 

Not only does a CLAT provide an initial tax deduction, it may pass assets to future generations with little or no gift tax obligation.

A CLAT will be known as being "zeroed out" if the scheduled payments to charity are enough to cause a 100-percent tax deduction for the money donated. Nevertheless, if the trust assets enjoy substantial growth, considerable amounts may still pass to the individual beneficiaries, untaxed.

CLATs are especially attractive in today's environment of low-interest rates. If the CLAT assets (often, securities or real estate) earn more than the applicable federal rate (AFR) published monthly by the IRS (presently 0.6 percent), assets will be left to the individual beneficiaries after the trust term. The lower the rate, the easier to grow assets at a higher pace and transfer assets to future generations. The present rate is 0.6%.

Charitable Remainder Unitrust (CRUT). A CRUT is the flip side of a CLAT. Payments from the trust first go to income recipients, not the charity, such as a lifetime income payout to a married couple, as long as either spouse is alive. When the income recipients have passed, whatever is left in the CRUT goes to designated charities. 

The word "unitrust" means that the payouts are set as a percentage of the trust's ongoing value. This permits possible income growth for the recipients, as opposed to the flat payouts that occur in an annuity trust.

With a CRUT, donors get a partial upfront tax deduction, based on the present value of a donation that may be paid many years in the future. Often, appreciated assets are used to fund a CRUT so that cash flow is based on their full value while tax on selling those assets are effectively spread over the income recipient's lifetime. At current capital gain rates, this deferral could, for example, be the difference in paying tax on the capital gains at 15% each year and doing so over time, rather than up to 23.8% (including the 3.8% net investment income tax) on a one-time asset sale.

Note that the CRUT payout rates can be structured to donate more or less to charity. Paying the CRUT minimum of 5% per year would leave more to charity, while a higher payout rate would leave less, down to as low as 10% of the CRUT's initial value.

These planned giving strategies are, needless to say, very complex and require advance thought and planning, not to mention the services of advisors with considerable experience in implementing them. The payoff in tax savings, however, can be very worthwhile.

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