Monday, March 31, 2014
Transferring Shares in A Business
Estate Planning: How Certificates of Shares Are Passed Down
How is the funding handled if you decide to use a living trust?
Certificates represent shares of a company. There are generally two types of company shares: those for a publicly traded company, and those for a privately held company, which is not traded on one of the stock exchanges.
Let's assume you hold the physical share certificates of a publicly held company and the shares are not held in a brokerage account. If, upon your death, you own shares of that company's stock in certificated form, the first step is to have the court appoint an executor of your estate.
Once appointed, the executor would write to the transfer agent for the company, fill out some forms, present copies of the court documents showing their authority to act for your estate, and request that the stock certificates be re-issued to the estate beneficiaries.
There could also be an option to have the stock sold and then add the proceeds to the estate account that later would be divided among the beneficiaries. If the stock is in a privately held company there would still be the need for an executor to be appointed to have authority. However, the executor would then typically contact the secretary or other officers of the company to inquire about the existence of a shareholder agreement that specifies how a transfer is to take place after the death of a shareholder. Depending on the nature of the agreement, the company might reissue the stock in the name(s) of the beneficiaries, buy out the deceased shareholder’s shares (usually at some pre-determined formula) or other mechanism.
If you set up a revocable living trust while you are alive you could request the transfer agent to reissue the stock titled into the name of the trust. However, once you die, the "trustee" would still have to take similar steps to get the stock re-issued to the trust beneficiaries.
If you open a brokerage account with a financial advisor, the advisor could assist you in getting the account in the name of your trust, and the process after death would be easier than if you still held the actual stock certificate.
Sunday, March 23, 2014
How Do You Put Assets Into Your Trust?
What Does the Term "Funding the Trust" Mean in Estate Planning?
If you are about to begin the estate planning process, you have likely heard the term "funding the trust" thrown around a great deal. What does this mean? And what will happen if you fail to fund the trust?
The phrase, or term, "funding the trust" refers to the process of titling your assets into your revocable living trust. A revocable living trust is a common estate planning document and one which you may choose to incorporate into your own estate planning. Sometimes such a trust may be referred to as a "will substitute" because the dispositive terms of your estate plan will be contained within the trust instead of the will. A revocable living trust will allow you to have your affairs bypass the probate court upon your death, using a revocable living trust will help accomplish that goal.
Upon your death, only assets titled in your name alone will have to pass through the court probate process. Therefore, if you create a trust, and if you take the steps to title all of your assets in the name of the trust, there would be no need for a court probate because no assets would remain in your name. This step is generally referred to as "funding the trust" and is often overlooked. Many people create the trust but yet they fail to take the step of re-titling assets in the trust name. If you do not title your trust assets into the name of the trust, then your estate will still require a court probate.
A proper trust-based estate plan would still include a will that is sometimes referred to as a "pour-over" will. The will acts as a backstop to the trust so that any asset that is in your name upon your death (instead of the trust) will still get into the trust. The will names the trust as the beneficiary. It is not as efficient to do this because your estate will still require a probate, but all assets will then flow into the trust.
Another option: You can also name your trust as beneficiary of life insurance and retirement assets. However, retirement assets are special in that there is an "income" tax issue. Be sure to seek competent tax and legal advice before deciding who to name as beneficiary on those retirement assets.
Monday, September 30, 2013
12 Problems That Could Cost Your Family a Fortune – and Their Solutions
Minnesota Estate Planning Attorney Discusses Frequent Issues/Concerns that Arise When Handling Someone's Estate
Problem #1: Probate. Probate is the Court-supervised process of passing title and ownership of a deceased person’s property to his or her heirs. The process consists of assembling assets, giving notice to creditors, paying bills and taxes, and passing title to property when the judge signs the order. Probate can cost your loved ones a sizeable portion of your estate. The biggest portion of the costs are the fees charged by attorneys and personal representatives for their services for the estate, in addition to filing fees, costs of publication, fees for copies of death certificates, filing and recording fees, bond premiums, appraisal and accounting fees, and so on. Often the fees of attorneys and personal representatives are based on a hourly rate, and while they can tell you what their hourly rate is, they cannot tell you the number of hours their services will take, so they cannot tell you what their total fees will be. Like surgery, probate can be simple and easy, but frequently probate can have very drastic and damaging results. Accordingly, like surgery, because of its uncertainty in terms of both the potential for problems and high costs and fees, probate is something best to prepare for if you can. You can avoid a substantially larger probate process by having an estate planning lawyer set up and fund a Revocable Living Trust. Since the Trust actually owns your assets, no significant probate of the estate will be required, saving your family many thousands of dollars.
Problem #2: Lawsuits and Creditors. Protect the property you leave to your partner/spouse and children from the claims of their creditors, ex-spouses, and the IRS. This can best be done with proper creditor protection provisions in a Revocable Living Trust.
Problem #3: Estate Taxes. For married couples, protect your assets from state and federal estate taxes by setting up and funding a tax-saving Credit Shelter Trust. Under current law, a Credit Shelter Trust will completely protect your assets from estate taxes for estates valued up to a certain amount will have to pay federal estate taxes. What is that amount? No one knows right now. The current exemption is $5,000,000 a person or $10,000,000 for a married couple.
Further, in Minnesota, the estate limit is $1,000,000 so your estate will pay taxes TO THE STATE for anything over $1,000,000. The tax rates generally comes out to 10% of the assets over that 1,000,000 mark.
Most couples don’t realize that the value of their estate for purposes of determining estate taxes includes their life insurance death benefit proceeds. Your estate includes EVERY asset you own at the time of death: real estate; cash, stocks, bonds, life insurance, retirement accounts, automobiles and personal property. It is not difficult to reach the $1,000,000 mark once all these assets are added up.
A well-designed estate plan costing between $3,000 and $6,000 will save a significant amount in federal estate taxes. Other ways you can avoid or reduce estate taxes include setting up (1) an Irrevocable Trust for your children, grandchildren or other heirs, (2) an Irrevocable Life Insurance Trust, (which detaches your life insurance benefits from your estate), (3) a Charitable Remainder Trust, and (4) Second-to-die Life Insurance so you can pay estate taxes for pennies on the dollar.
Problem #4: Income Taxes. A family can lower its overall income taxes by setting up a Family Limited Partnership to own income-producing property. A parent can do this by setting up a Family Limited Partnership and making gifts of limited partnership interests to the other limited partners, normally their children or grandchildren who pay income tax at lower tax rates. A Family Limited Partnership is an excellent tool to shift income to partners who pay taxes at lower rates. It is also an effective way to make gifts and still keep total control of the property owned by the partnership.
Problem #5: Lawsuits. Protect your assets from lawsuits by doing any or all of the following, as appropriate: (1) purchasing an umbrella liability insurance policy, (2) setting up a Family Limited Partnership, (3) setting up a program for lifetime gifting, (4) setting up a Limited Liability Company, and (5) incorporating. Further, you can protect your children from lawsuits by putting their inheritances into a Discretionary Trust. This is especially important if your children are likely to become professionals subject to potential malpractice actions or, on the other hand, are spendthrifts!
Problem #6: Inexperienced Beneficiaries. Protect your assets from being wasted by young or inexperienced family members. Most beneficiaries spend their entire inheritances in less than two years, regardless of the size of the estate or the heir’s socio-economic background. Your lawyer can set up your Family Trust with protective provisions that provide guidance and safeguard your life savings.
Problem #7: Guardianships. Protect your assets from the high costs of incapacity by (1) setting up a Living Trust so you avoid the need for a guardianship, (2) drawing up an Advance Healthcare Directive, and (3) drawing up a Health Care Power of Attorney.
Problem #8: Nursing Home Care. Protect joint assets from the high costs of nursing home care. Buy insurance that covers nursing home care and provides a death benefit that returns the money spent on nursing home care to your heirs.
Problem #9: Unwanted Medical Care. Protect your assets from unwanted and costly medical care by having an Advance Healthcare Directive and Health Care Powers of Attorney that spell out your instructions, including which medical care, treatment and procedures you want -- and which you don’t want.
Problem #10: Unwanted Emergency Care. Protect your assets from unwanted emergency care. If you have a terminal illness, you can draw up and sign a Pre-hospital Medical Directive that will tell emergency personnel not to resuscitate you in the event of a medical emergency. This directive is often referred to as a “Do Not Resuscitate Order”.
Problem #11: Ineffective Estate Plans. Protect your assets from an ineffective estate plan. Don’t depend on pre-printed “cookie cutter” form kits or document preparation services for your estate plan. Contrary to what you may have heard or read, one size does not fit all! You may think you have precisely what you need. But you will never know -- because your family members will have to clean up the mess. You see, after you die, your family members will try to use your documents to settle your estate. And if the documents weren’t drafted correctly, they will cause additional expense and long delays because a probate will have to be done to convey title to your assets.
Problem #12: Unqualified Lawyers. Many attorneys are getting into estate planning because it’s less stressful than other areas of law. Not surprisingly, most of these newcomers focus on the needs of senior citizens and almost never deal with issues affecting young families. If you have young children, make sure you choose an independent attorney who focuses their law practice on asset protection and estate planning for young families. This will help insure that the lawyer you choose has the knowledge, skill, experience and judgment necessary to fully protect your family and your assets, and to give you advice and counsel that is in your best interests.
Monday, September 23, 2013
8 Potential Problems With Revocable Living Trusts
Problem #1: Choosing the wrong trustee. Many people believe that you must name your bank as your trustee, but this is not the case. You act as your own trustee (if you are married, your spouse can serve as a co-trustee) during your lifetime so you continue to manage and invest your assets, just as you do now. If you do not choose to serve as trustee, you may hire a professional fiduciary who is not affiliated with a bank or trust company.
Problem #2: Leaving your Trust empty. A Revocable Living Trust is like a safe deposit box. It’s a good place to put your valuables, but it won’t do any good if you leave it empty. It’s not uncommon for people to have a lawyer draw up their Trust and then, years later, still have to go through probate. Why? Because the client never put their assets into the Trust and the attorney didn’t bother to help the clients with funding the Trust. Your property must be put into the Trust. But don’t worry. The process of retitling assets is easier than you think.
Problem #3: Initial cost. A Revocable Living Trust is more expensive to set up than a simple Will. But, in the long run, the cost will probably be much less because the Revocable Living Trust allows you to avoid probate, Court supervised estate administration, guardianships and conservatorships.
Problem #4: The potential for poor management. You could find that the person you selected to man-age your affairs is not a good manager. Your choices for successor trustee(s) should be family members or friends you can trust. Corporate trustees, such as banks, are also an option. But, even if you don’t put your assets into a trust, you could still have a problem with management of your assets.
Problem #5: Refinancing real estate may be inconvenient. Some mortgage companies and banks re-quire that you take real estate out of your Trust before they will place a new mortgage on your property. Once the financing is complete, then you simply transfer the property back into your Trust. Unique Estate Law assists clients who encounter this situation without additional fees.
Problem #6: Keeping a list of assets in your Trust. Some people don’t like to keep track of assets they put into their Trust. Others don’t mind this small amount of extra work. When you want to add some-thing to your Trust, you simply title it in the name of the trustees and add it to your list. I assure you the benefits of having a Revocable Living Trust far outweigh these minor inconveniences.
Problem #7: Opening a new bank account. Some banks will require you to close your current bank account and open a new bank account if you transfer the account into a Trust. This is a matter of the bank being uninformed. If you have substantial direct deposits or automatic debits, it will be necessary to see that the new account is functioning properly before closing the old account.
Problem #8: Imprinting on your checks. Some banks will require that you put the name of your Trust and trustees on the checks. You can respond to this in one of three ways. (1) The name of your Trust and trustees can very closely match your own name and be abbreviated in many respects. (2) You can order checks from a printing company with anything on them that you choose. Or (3) you can print your own checks with very simple and inexpensive computer software packages.
Monday, June 17, 2013
The New Minnesota Gift Tax Law
A Twin Cities Estate Planning Attorney Explains Minnesota's New Gift Tax Law
What does Minnesota now have in common with Connecticut? We are the only two states that have their own gift tax law.
The legislature passed a bill creating a new Minnesota gift tax in the last legislative session. The law was hastily crafted and has numerous discrepancies so it's fair to say that courts will be needed for future interpretation. But here is a quick summation for your reference.
You will now have to pay a flat 10% tax on any gifts made after June 30, 2013 and totaling greater than $1,000,000 over a lifetime. the law does include a lifetime credit of $100,000 allowed on the first $1,000,000 gifted. The Minnesota gift tax will not apply to present-value "annual exclusion" gifts of up to $14,000 (in 2013) or gifts to a spouse or a charity.
You are still allowed to use the federal annual exclusion amount of $14,000 without worrying about the gift being added to your lifetime total. But, any amount beyond that and which is made within three years of the decedent's death must be added to the value of the decedent's estate to determine if the estate exceeds the $1,000,000 filing requirement. This provision is retroactive to December 31, 2012. It is unclear how this 3 year retroactivity clause will play out as it seems unfair (perhaps unconstitutional) to subject a decedent's estate to a gift tax that did not exist when he/she originally drafted an estate plan.
For questions on the new gift tax, please contact me to discuss whether you may save on taxes by gifting an asset prior to July 1, 2013.
Monday, May 13, 2013
Overview: Buy-Sell Agreements and Your Small Business
Minneapolis Business Lawyer Explains Why Your Small Business Needs a Buy-Sell Agreement
If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.
With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.
A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily. Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?
In crafting your buy-sell agreement, consider the following issues:
Triggering Events - What events trigger the provisions of the agreement? These normally include death, disability, bankruptcy, divorce and retirement.
Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula. The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event. Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.
Funding - How will the departing owner be paid? Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners. With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”). Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”). The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.
Wednesday, May 08, 2013
Family Business: Preserving Your Legacy for Generations to Come
A Twin Cities Business Lawyer Discusses How You Can Protect Your Family Business
Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.
More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.
Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
Make sure your succession plan includes: preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
Add independent professionals to your board of directors.
You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.
Sunday, January 27, 2013
2013 Changes to Federal Estate Tax Laws
Minneapolis Estate Planning Lawyer Discusses the New Estate Tax Laws
2013 Changes to Federal Estate Tax Laws
I know I promised to post about the lessons I've learned in dealing with the illnesses and deaths of my parents, but I am interrupting that series to post the important changes made by Congress that affect my estate-planning clients.
Changes to income taxes grabbed the lion’s share of the attention as the President and Congress squabbled over how to halt the country’s journey towards the “fiscal cliff.” However, negotiations over exemptions and tax rates for estate taxes, gift taxes and generation-skipping taxes also occurred on Capitol Hill, albeit with less fanfare.
The primary fear was that Congress would fail to act and the estate tax exemption would revert back down to $1 million. This did not happen. The ultimate legislation that was enacted, American Taxpayer Relief Act of 2012, maintains the $5 million exemption for estate taxes, gift taxes and generation-skipping taxes. The actual amount of the exemption in 2013 is $5.25 million, due to adjustments for inflation.
The other fear was that the top estate tax rate would revert to 55 percent from the 2012 rate of 35 percent. The top tax rate did rise, but only 5 percent from 35 percent to 40 percent.
The American Taxpayer Relief Act of 2012 also makes permanent the portability provision of estate tax law. Portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse to be used in addition to the surviving spouse’s individual $5.25 million exemption.
Some Definitions and Additional Explanations
The federal estate tax is imposed when assets are transferred from a deceased individual to surviving heirs. The federal estate tax does not apply to estates valued at less than $5.25 million. It also does not apply to after-death transfers to a surviving spouse, as well as in a few other situations. Many states also impose a separate estate tax.
The federal gift tax applies to any transfers of property from one individual to another for no return or for a return less than the full value of the property. The federal gift tax applies whether or not the giver intends the transfer to be a gift. In 2013, the lifetime exemption amount is $5.25 million at a rate of 40 percent. Gifts for tuition and for qualified medical expenses are exempt from the federal gift tax as are gifts under $14,000 per recipient per year.
The federal generation-skipping tax (GST) was created to ensure that multi-generational gifts and bequests do not escape federal taxation. There are both direct and indirect generation-skipping transfers to which the GST may apply. An example of a direct transfer is a grandmother bequeathing money to her granddaughter. An example of an indirect transfer is a mother bequeathing a life estate for a house to her daughter, requiring that upon her death the house is to be transferred to the granddaughter.
Monday, November 26, 2012
Estate Planning: Leaving Assets to a ‘Troubled’ Heir
A Minnesota Estate Planning Attorney Discusses Complex Estate Planning Techniques
If you have a child who is addicted to drugs or alcohol, or who is financially irresponsible, you already know the heartbreak associated with trying to help that child make healthy decisions. Perhaps your other adult children are living independent lives, but this child still turns to you to bail him out – either figuratively or literally – of trouble.
If these are your circumstances, you are probably already worrying about how to continue to help your child once you are gone. You predict that your child will misuse any lump sum of money left to him or her via your will. You don’t want to completely cut this child out of your estate plan, but at the same time, you don’t want to enable destructive behavior or throw good money after bad.
Trusts are an estate planning tool you can use to provide an inheritance to a worrisome heir while maintaining control over how, when, where, and why the heir accesses the funds. This type of trust is sometimes called a spendthrift trust.
As with all trusts, you designate a trustee who controls the funds that will be left to the heir. This trustee can be an independent third party (there are companies that specialize in this type of work) or a member of the family. It is often wise to opt for a third party as a trustee, to prevent accusations among family members about favoritism.
The trust can specify the exact circumstances under which money will be disbursed to the heir. Or, more simply, the trust can specify that the trustee has complete and sole discretion to disburse funds when the heir applies for money. Most parents in these circumstances discover that they wish to impose their own incentives and restrictions, rather than rely on the judgment of an unknown third party.
The types of conditions or incentives that can be used with a trust include:
Drug or alcohol testing before funds are released
Payments directly to landlords, colleges, etc., rather than payment to the heir
Disbursement of a specified lump sum if the heir graduates from university or keeps the same job for a certain time period
Payment only to a drug or alcohol rehab center if the child is in an active period of addiction
Disbursement of a lump sum if the child remains drug free
Payments that match the child’s earned income
If you are considering writing this type of complex trust, it is advisable to seek assistance from a qualified and experienced estate planning attorney who can help you devise a plan that best accomplishes your wishes with respect to your child.
Wednesday, October 31, 2012
Tax Saving Plan: Year End Gifts
Year End Gifts
If you’re like most people, you want to make sure you and your loved ones pay the least amount of tax possible. Many use year-end gift giving as a way to transfer wealth to younger generations and also reduce the overall potential estate tax that will be due upon their death. Below are some steps you can take to make gifts to your heirs without triggering any gift tax liability. Some of these techniques may also reduce your own income tax liability.
A combination of estate and gift tax exemptions can be used to significantly reduce the overall tax liability of your estate. Upon your death, federal estate tax may be owed. A portion of your estate is exempt from the tax. That exemption amount is set by Congress and can change from year to year. For deaths that occur in 2012, the exemption amount is $5 million and the value of an estate in excess of that amount is subject to estate tax. Beware: That will likely change in 2013 as the current law expires.
Many taxpayers make annual gifts to loved ones during their lifetimes, to reduce the overall value of the estate so that it does not exceed the exemption amount in effect at the time of death. It is important to consider that gifts made during your lifetime are subject to a gift tax (equal to the estate tax). However, certain gifts or transfers are not subject to the gift tax, enabling you to make tax-free gifts that benefit your loved ones and reduce the overall taxable value of your estate upon your death.
The annual gift tax exclusion allows each individual to make annual gifts of up to $13,000 to each recipient. There is no limit to the number of recipients who may each receive up to $13,000 totally tax-free. Married couples may gift up to $26,000 to each recipient without triggering any tax liability. This annual exclusion expires on December 31 of each year, and larger gifts may be made by splitting it up into two payments. By making a payment in December and one the following January, you can take advantage of the gift tax exclusion for both years. Keeping annual gifts below $13,000 per recipient ensures that no gift tax return must be filed, and that there is no reduction in the estate tax exemption amount available upon your death.
Annual gifts may also be made in the form of contributions to a §529 College Savings Plan. These, too, are subject to the $13,000 annual gift tax exclusion. Additionally, such contributions may afford the giver with a state tax deduction.
Payment of a beneficiary’s medical expenses is also excluded from the gift tax. There is no limit to the amount of medical expense payments that may be excluded from tax. To qualify, the payment must be made directly to the health care provider and must be the type of expenses that would qualify for an income tax deduction.
If you have a large estate that may be subject to taxes upon your death, making annual gifts during your lifetime can be a simple way to reduce the size of your estate while avoiding negative tax consequences.
Tuesday, January 17, 2012
Charitable Giving Through Estate Planning
Many people give to charity during their lives, but unfortunately too few Americans take advantage of the benefits of incorporating charitable giving into their estate plans. By planning ahead, you can save on income and estate taxes, provide a meaningful contribution to the charity of your choice, and even guarantee a steady stream of income throughout your lifetime.
Those who do plan to leave a gift to charity upon their death typically do so by making a simple bequest in a will. However, there are a variety of estate planning tools designed to maximize the benefits of a gift to both the charity and the donor. Donors and their heirs may be better served by incorporating deferred gifts or split-interest gifts, which afford both estate tax and income tax deductions, although for less than the full value of the asset donated.
One of the most common tools is the Charitable Remainder Trust (CRT), which provides the donor or other designated beneficiary the ability to receive income for his or her lifetime, or for a set period of years. At death, or the conclusion of the set period, the “remainder interest” held in the trust is transferred to the charity. The CRT affords the donor a tax deduction based on the calculated remainder interest that will be left to charity. This remainder interest is calculated according to the terms of the trust and the Applicable Federal Rate published monthly by the IRS.
The Charitable Lead Trust (CLT) follows the same basic principle, in reverse. With a CLT, the charity receives the income during the donor’s lifetime, with the remainder interest transferring to the donor’s heirs upon his or her death.
To qualify for tax benefits, both CRTs and CLTs must be established as:
A Charitable Remainder Annuity Trust (CRAT) or a Charitable Lead Annuity Trust (CLAT), wherein the income is established at the beginning, as a fixed amount, with no option to make further additions to the trust; or
A unitrust which recalculates income as a pre-set percentage of trust assets on an annual basis; which would be either a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).
Another variation is the Net Income Charitable Remainder Unitrust, which provides more flexible payment options for the donor. One advantage to this type of trust is that a shortfall in income one year can be made up the following year.
The Charitable Gift Annuity (CGA) enables the donor to buy an annuity, directly from the charity, which provides guaranteed fixed payments over the donor’s lifetime. As with all annuities, the amount of income provided depends on the donor’s age when the annuity is purchased. The CGA gives donors an immediate income tax deduction, the value of which can be carried forward for up to five years to maximize tax savings.
IRA contributions are also an option through 2011 for donors who are at least 70½ years of age. Donors who meet the age requirement can donate funds in an Individual Retirement Account (IRA) to charity via a charitable IRA rollover or qualified charitable distribution. The amount of the donation can include the donors’ required minimum distribution (RMD), but may not exceed $100,000. The contribution must be made directly by the trustee of the IRA.
With several ways to incorporate charitable giving into your estate plan, it’s important that you carefully consider the benefits and consequences, taking into account your assets, income and desired tax benefits. A qualified estate planning attorney and financial advisor can help you determine the best arrangement which will most benefit you and your charity of choice.
From within Hennepin County Unique Estate Law represents estate planning and elder law clients throughout Minnesota, including Minneapolis, Edina, Bloomington, St. Louis Park, Minnetonka, Plymouth, Wayzata, Maple Grove, St. Paul, and Brooklyn Park. The Minnesota law firm of Unique Estate Law focuses on all aspects of estate planning, including specialized wills, trusts, powers of attorney and medical directives for married couples, young families, blended families, single parents, gay families and those going through a divorce. Unique Estate Law also handles probate administration, asset protection, Medical Assistance planning, elder law, business succession planning, adoptions and cabin planning.