Giving to charitable causes and institutions can be quite rewarding when you are devising your legacy plan. If you are in a position to do so, you could engage in philanthropic acts that benefit worthy nonprofit organizations.
There are various different ways that you can support charities, and one possibility is the creation of a private charitable foundation.
When you think about private foundations, you may immediately flash upon the foundations that have been established by some of the wealthiest families in the country. Names like Rockefeller, Ford, and Gates will probably come to mind.
Because these foundations were started by such high-profile families, you may be under the impression that foundations are always funded by billionaires. In reality, most of the foundations in the United States are working with less than $1 million, so the creation of a foundation may be within reach.
There are also charitable trusts that can be used to support charities while you simultaneously gain tax advantages. The federal estate tax is a factor for people who are transferring more than $5.45 million.
One type of charitable trust that you may want to consider is called a charitable lead annuity trust or CLAT.
Establishing a CLAT
When you establish a CLAT, you are called the grantor of the trust. You are removing the assets from your estate for estate tax purposes when you convey assets into it, so this is a positive.
A charitable beneficiary is named, and you also name non-charitable beneficiaries.
The charitable beneficiary would receive annual annuity payments that are equal to a certain prescribed percentage of the CLAT. The non-charitable beneficiaries would assume ownership of anything that may remain in the CLAT after the expiration of the trust term.
Since non-charitable beneficiaries may ultimately assume ownership of a remainder, the gift tax could be applicable. To account for this, the IRS applies anticipated interest to the taxable value of the trust using the hurdle rate, which is 120 percent of the federal midterm rate.
When interest rates are low, as they have been for a while now, assets that have been conveyed into the trust could potentially outperform the hurdle rate that was added to the value of the trust for tax purposes. The idea from a tax efficiency standpoint would be to allow the charitable beneficiary to receive annuity payments that are equal to all or most of the taxable value of the trust.
At the conclusion of the trust term, there would be a remainder if the assets performed well. The non-charitable beneficiaries could potentially assume ownership of the remainder free of any gift tax consequences.
Achieve Your Legacy Goals
If you would like to discuss your legacy goals with a law firm that provides personalized attention, we would be glad to help. Each family is unique, so your plan should be tailor-made to suit your needs.
We provide no obligation consultations, and we would be glad to discuss your legacy goals with you in person. To set up an appointment, send us a message through the following page and we will get back in touch with you as soon as we can: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.