CRT VS CLT One of the best estate tax planning techniques is done by making use of both gifts and

charitable donations during the taxpayers life. How is this done? One way is by using a CRT. What is a CRT? A CRT is a charitable remainder trust where a donor transfers assets either cash or property to a trust, and specifies a certain amount that should go to non-charitable persons as a gift, and whatever amount is left in the trust at the end of the term will go to a chosen charity. Why is this so great? Number one, the taxpayer gets a current income tax charitable deduction on the value of the assets that were transferred to the trust. Second, as much as the income within the trust appreciates, the donor will not be taxed on it. Third, the property in the trust can appreciate as high as it wants, but the sale of it will be tax-free to the donor. Last, the non-charity beneficiary will not be taxed on any income or gain from the trust until s/he constructively receives it. Like anything in life, there are some disadvantages to a CRT. Any property or cash that is contributed to the trust must remain in the trust instead of the donor having the use of it. The property will never go back to the donor or his/her family. Also, some private foundation rules can apply to the CRT. If one decides to go with a CRT, there are different flavors available. A charitable remainder annuity trust (CRAT) pays an annuity to the non-charity recipient. The annuity is specified in the trusts governing instrument as either a yearly allowance based on a specified dollar amount, or possibly as a percentage of the opening value of the trust. In a charitable remainder unitrust (CRUT), the trust has to pay the non-charity beneficiary an annual amount based on the annually determined value of the trust. There are also fixed percentage CRUTs, NIOCRUTs (net income only CRUTs), NIMCRUTs (net income with makeup CRUTs), FLIPCRUTs (a CRUT that toggles from a NIMCRUT or NIOCRUT to a fixed percentage CRUT if certain events occur), and many more. 664 details the various requirements and rules that regulate the CRTs. The trust may not exceed a term of 20 years, or it may last as long as the life of the recipient(s). At the end of the term, the assets either remain in trust for the charity, or go directly to the charity. The donor of the assets may be the trustee of the CRT, so long as s/he doesnt cause the trust to become a grantor trust by his/her retaining certain powers. Conversely, a CLT, or a charitable lead trust, is a perfect technique for the rich. Instead of paying a recipient for a few years and then transferring the assets to a charity, the CLT works just the opposite. Its the charity that gets the yearly payout of an annuity or a percentage, and at the end of the term, the remainder passes to a designated non-charitable recipient. The benefit is that the donor gets a gift or estate tax charity deduction, and sometimes, even a charitable deduction for income taxes. The noncharity remainder portion is treated as a taxable inter-vivos gift.

Why would someone create a CLT? For one, someone can have an asset that is expected to outperform the actuarial tables, and, therefore, will be valued at less than the real value of the property that will be gifted. Another case can be where, for tax purposes, the worth of the remainder gift is greater than the value of the gift, if the donor doesnt anticipate living as long as the actuaries predict him/her to. Also, when someone can no longer take a charitable deduction because s/he already maxed the limit, creating a CLT enables the taxpayer to move the deduction into another tax base. Last, donating to the CLT will enable the taxpayer to get a charitable deduction, even if the ultimate charity is foreign. Like CRTs, CLTs also have many different forms. There are CLATs (charitable lead annuity trusts), CLUTs (charitable lead unitrusts), and many others. Basically, in an estate plan, it would be wise to consider CRTs or CLTs based on the taxpayers assets and available deductions. There are many advantages and disadvantages, but as long as these tools are used right, the taxpayer will be able to gift property and give charity without worrying about losing his/her deductions and without having to pay a high gift tax.