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Seeking Tax Shelter Through Charitable Trusts

A charitable trust may be a worthwhile estate planning tool if there is a charity you'd like to support. Highly appreciated assets are often contributed to charitable trusts in order to eliminate capital gains tax that would be due if the asset were sold.

Charitable remainder trusts come in two basic forms:

  • The Charitable Remainder Annuity Trust (CRAT)
  • The Charitable Remainder Unitrust (CRUT).

The main differences: A CRAT pays out a fixed dollar amount every year, established at the time the trust is set up. Conversely, a CRUT pays out an annual amount based on the trust's investment performance, which can fluctuate.

For either type of trust, the annual payout cannot be less than five percent of the trust's value. If a CRAT's annual earnings are not sufficient to cover the required payout, it must dip into its principal or accumulated earnings to make the payment. A CRUT, however, can be set up so that it defers payouts until the trust's earnings are enough to support them.

As you consider your charitable options, keep in mind that a rise or fall in interest rates can affect some trusts. Your estate planning adviser can explain the exact details but here are the basics.

A charitable remainder annuity trust is a relatively simple tax shelter. First, you transfer money or property to an irrevocable trust. The trust then provides annual income to a designated beneficiary for his or her lifetime or a specific number of years. When the trust term ends, the remaining assets automatically go to the charity of your choice.

In return for your generosity, you are entitled to a current tax deduction for the present value of assets you've transferred to the trust. The exact amount of the deduction depends on interest rates, your age and other factors.

A charitable lead trust is often described as the reverse of a charitable remainder trust. With this option, the charity receives income during your lifetime or a specified period.

The beneficiary receives the remainder of the trust after your death. The gift value of the remainder going to the beneficiary can vary due to a rise or fall in interest rates.

Consult with your estate planner on how to set up a charitable trust and what the best option is in your situation.

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