Michigan Estate Planning Blog

Should I have a Charitable Trust in My Estate Plan?

 

Charitable trusts can be created to provide a reliable income stream to you and your beneficiaries for a set period of time, says Bankrate’s recent article entitled “What is a charitable trust?”
Establishing a charitable trust can be a critical component of your estate plan and a rewarding way to make an impact for a cause you care deeply about. There are a few kinds of charitable trusts to consider based on your situation and what you may be looking to accomplish.
Charitable lead trust. This is an irrevocable trust that is created to distribute an income stream to a designated charity or nonprofit organization for a set number of years. It can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes, as well as current year income tax deductions when the assets are donated to the trust.
If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 60% of their adjusted gross income (AGI), and any unused deductions can generally be carried over into subsequent tax years. The deduction limit for appreciated securities or other assets is limited to no more than 30% of AGI in the year of the donation.
At the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs, or designated beneficiaries—not the charity.
Charitable remainder trust. This trust is different from a charitable lead trust. It’s an irrevocable trust that’s funded with cash or securities. A CRT gives the donor or other beneficiaries an income stream with the remaining assets in the trust reverting to the charity upon death or the expiration of the trust period. There are two types of CRTs:
A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year, and there are no additional contributions can be made to a CRAT.
A charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated every year. Additional contributions can be made to a CRUT.
Here are the steps when using a CRT:
Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets, such as real estate, to the trust. The amount of the tax deduction is a function of the type of CRT, the term of the trust, the projected annual payments (usually stated as a percentage) and the IRS interest rates that determine the projected growth in the asset that’s in effect at the time.
Receive an income stream for you or your beneficiaries based on how the trust is created. The minimum percentage is 5% based on current IRS rules. Payments can be made monthly, quarterly or annually.
After a designated time or after the death of the last remaining income beneficiary, the remaining assets in the CRT revert to the designated charity or charities.
There are a number of benefits of a charitable trust that make them attractive for estate planning and other purposes. It’s a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to the charity and the donor. The trust also provides upfront income tax benefits to the donor, when the contribution to the trust is made.
Donating highly appreciated assets, such as stocks, ETFs, and mutual funds, to the charitable trust can help avoid paying capital gains taxes that would be due if these assets were sold outright. Donations to a charitable trust can also help to reduce the value of your estate and reduce estate taxes on larger estates.
However, charitable trusts do have some disadvantages. First, they’re irrevocable, so you can’t undo the trust if your situation changes, and you were to need the money or assets donated to the trust. When you establish and fund the trust, the money’s no longer under your control and the trust can’t be revoked.
A charitable trust may be a good option if you have a desire to create a legacy with some of your assets. Talk with an experienced estate planning attorney about your specific situation.
Reference: Bankrate (Dec. 14, 2021) “What is a charitable trust?”

SPECIAL NEEDS TRUSTS

Here is a summary of a great article from Forbes.  http://www.forbes.com/2010/06/10/estate-planning-special-needs-children-personal-finance-bernard-krooks.html?boxes=Homepagechannels

Providing for children in an estate plan is not a simple task. For parents of children with special needs, the concerns and difficulties are magnified since, in many cases, the child will not be able to care for himself after the parents pass away. With recent advances in modern medicine, people with disabilities are living longer; meaning aging parents need to address this issue. However, since estate planning involves facing many difficult issues, many parents put it off--especially when they are already stretched thin navigating the special needs maze, obtaining services for and caring for their child. There is more to estate planning--particularly when special needs children are involved--than signing some documents and putting them in a strong box or filing cabinet, never to be found again. As a general rule, we should keep our estate planning documents in a safe place that is readily accessible in the event they are needed. Parents of children with special needs should also use a binder that contains all the information that future caregivers will need to carry on after the parents are gone. The information in the binder should be updated periodically to reflect changes in family circumstances, changes in the needs or desires of your child, and other issues that may assist your child's future caregivers in carrying out their duties. Here are 10 things to put in that binder:

Article 1. Important legal papers for any children with special needs (for example, birth certificates, Social Security cards and health-insurance cards).

 2. A "Letter of Intent," which parents should update at least once per year. This is a nonbinding document that passes vital information about a person with a disability to future caregivers. It can include such things as your child's sleeping preferences, eating habits and other important aspects of your child's daily routine. While these items may be second nature to you, it is important not to take them for granted. After all, in many cases the future caregivers assume their role in caring for your child without having actually walked a single day in your shoes.

 3. Written instructions spelling out any wishes regarding final arrangements (burial, cremation or religious services or other ceremonies that may be desired).

 4. Your own advance health care and financial directives such as powers of attorney, living wills and health care proxies. By having these documents in a binder that can be accessed when needed, you can save your family the heartache and expense of a guardianship proceeding should you yourself become incapacitated. This is important for any family, but if you have special needs children it is crucial; the last thing you want is confusion over your own wishes to distract from the needs of your child. Related Stories States and Patients Face Cuts in Federal Medicaid Backing and Services

5. Copies of any trusts--special needs trusts, living trusts, or insurance trusts--that may have been prepared. Remember, signed copies or originals may be needed to complete property transfers. Thus, you should also provide Information about where the original documents are kept, whether that's at an attorney's office or in a safety deposit box.

 6. A list of major assets and information about where they are kept (for example, a list of insurance policies, stocks, mutual funds, bank accounts, with policy and account numbers and the names of any brokers, insurance agents and investment advisors).

 7. Guardianship papers for your special needs child, if any, and a list of advocacy organizations that may be helpful. Also, write down any personal reflections or thoughts you may have about these organizations.

ELDER LAW / SOCIAL SECURITY

If you’re not already familiar with the Social Security Administration’s website, it may be time to start. You may already know that you can go online to get an application to replace your Social Security card, apply for Medicare, retirement or disability benefits, even search popular baby names. While all those online services may be helpful, a new addition to the website may become essential. The government is working to provide your yearly earnings statement online by the end of this year, and forego the massive mailings. The statements, mailed to 150 million people each year, show a projection of your future benefits and include a history of taxable earnings for each year – so people can check for mistakes – as well as the total amount of Social Security and Medicare taxes paid over your lifetime. While certainly a useful retirement planning tool for workers, the mailed statements cost the SSA more than $70 million a year. In a recent article from the Associated Press, Social Security Commissioner Michael Astrue says the website offers the same estimates, while also allowing the individual to run scenarios to test their preparation and various outcomes. Nevertheless, critics point out that it does not, as yet, offer the detailed history of taxable incomes, which means you’ll have no way of catching possible mistakes. Plus, if you’re not really computer-savvy, or don’t have access to high-speed internet, the website could be quite difficult to use. Stopping the mailed statements is part of a trend in government to conduct more of its business electronically. The SSA already mails out few paper checks. About 88 percent of beneficiaries have their payments deposited directly into bank accounts, and approximately 41 percent of applications for retirement benefits come in online. Visit the SSA website to find out more about what you can now do online. Link: http://www.google.com/hostednews/ap/article/ALeqM5jpAl99XogTaK8a281YRjuOQXZx1Q?docId=c2ac1867eeeb48dbbb943a8d680f9a56 From The Associated Press (April 7, 2011) “Social Security Stopped Mailing Earning Statements”

ESTATE PLANNING / CHILDREN’S TRUSTS

From NWI.COM (Feb 27, 2011) “Estate Planning: Discretion within a child’s trust”

 Article quotation:

Setting up a testamentary trust for a child under a certain age is a common estate planning tool. The age sometimes varies, but the goal is usually the same; protect a loved one’s shares until they are at an age when they can manage it themselves.

 A reader wrote recently to the business columnist at NWI with a common question: “My will says that my son’s share is held in trust until he is 25. What if he is married by 23 and has a baby? Does he still have to wait until he is 25 to get the money?”

The reply was somewhat simplistic, I thought, explaining that perhaps it would be good to give the trustee wide discretion to distribute funds out of and terminate a trust established for your children. Certainly, a testamentary trust of this sort that distributes funds outright to the beneficiary at a certain age, even with wide discretion on the part of the trustee, is better than no trust at all. As the writer comments, “Generally, I look at a testamentary trust provision for a minor as simply putting a responsible adult between a child and a pile of money. It's not there it punish the child but rather to protect him.”

There are however, other strategies you might want to consider when planning for your (currently) minor children. The greatest inheritance protection is achieved when your estate plan creates a Long-Term Discretionary Trust to administer the inheritance for your children. Such an arrangement can make both income and principal available to your children for their health, education, maintenance and support, as well as for any purpose deemed appropriate in the discretion of your appointed inheritance managers.

You can learn more about Long-Term Discretionary Trusts and other estate planning strategies in the July issue of our estate planning newsletter, Majoring in Minor Children. Be sure to sign up to subscribe to our free monthly e-newsletter, which is full of estate planning tips for you and your family.

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