Donors can be the trustees of the trust and decide how to invest the trust’s assets. In addition, they get an income tax deduction for their contribution to the belief that is based on the term of the faith, the size of the gift, the distribution rate, and the assumed earnings on the trust.
At this point, the assets are now removed from their estate, they have paid no tax on the capital gains, and they have a stream of income. The IRS requires at least 10% of the present value to be projected to go to a charity of your choice.
If someone wanted the money to be left to family, they could use part of the money they would have paid taxes and buy a life insurance policy outside of their estate. Then, their children will still receive as much or more inheritance money, free of income and estate taxes.
A CGET can be used with real estate, stocks, or any other asset with capital gains and must be unencumbered with debt.
Details:
CGETs are subject to a maze of law and regulation. The failure of a CGET to meet all requirements can result in a trust being disqualified as a Charitable Remainder Trust, with negative income, gift, and federal estate tax consequences. The loss of charitable status would also defeat a donor’s charitable intent.
Some of these requirements involve numerical tests, several of which have long been a part of the qualifying conditions for CRTs—the Taxpayer Relief Act of 1997 (TRA 97).
Pre-TRA 97
5% probability test (this applies only to charitable remainder annuity trusts)
5% minimum payment test
TRA act of 1997
50% payout limitation test
10% minimum charitable benefit
Relief Provisions
TRA 97 provided several relief provisions for trusts which would meet all CRT requirements, except the 10% minimum charitable benefit requirement. The law provides that a trust may be declared void ab initio (from the beginning). Under this option, no charitable tax deduction is permitted to the donor for the transfer, and any income or capital gains created by property transferred to the CRT becomes income and capital gain to the donor.
The new law also allows a donor to reform a trust by modifying either the annual payout or the term of a CRT (or both) to enable the confidence to meet the 10% minimum charitable benefit. Strict time limits have been imposed for this reformation.
Seek Professional Guidance
The laws and regulations surrounding Charitable Remainder Trusts can be complex and confusing. Individuals facing decisions concerning the tax and estate planning implications of a CGET are strongly advised to consult with now there is $1 million cash that can be invested. This could go into a balanced portfolio or an annuity. It doesn’t matter. And Beth and John can make a one-time decision on how much lifetime income they’ll receive from the trust.
If you ever have questions about planning for your immediate or long-term retirement goals, please feel free to call or send in the enclosed coupon.
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