Charitable Planning

If you are a person who regularly gives money to charity, this planning strategy may be a good option for you. Using charitable planning, you can give money to a charity and get a tax break.

Types of Charitable Planning

There are two types of charitable trusts. Charitable Remainder Trust and Charitable Lead Trust.

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays a set percent of interest to you per year and remainder interest to a charity of your choice. You get a tax deduction based on the value of the future gift. There are different types of CRTs. An annuity trust pays you the same percentage every year. An Uni Trust the percent can vary depending on market conditions so you do not use up the principal ensuring the term of the will last.

A CRT is a great way to get rid of capital gains for highly appreciated property. You set up the trust. Transfer the property into the trust. Sell the property in the trust. You pay NO capital gains.

A CRT can also be used with highly appreciated C-corp stock. In order to avoid paying capital gains the stock must be sold in the CRT. This option provides you with an income stream and allows you to benefit a charity of your choice. CRTs do not work with S-corp stock.

There are many different types of CRTs. The type will depend on how the interest is paid to you. The interest can be the same every year or it can vary with the market. You can also set up the trust to vary with the market but have makeup provisions in good years. There are lots of options.

Another type of trust is Charitable Lead Trust (CLT). A CLT pays the charity with an income stream and, after a certain period of time, the ownership of the trust assets go to the beneficiary of the trust. Typical beneficiaries are children and grandchildren.

In general, CLTs are best utilized to move a portion of your estate to your children or grandchildren thus lowering the cost to transfer the assets to that generation.
There are two types of CLTs, a Charitable Lead Annity Trust and a Charitable Lead Uni-Trust. The donor gets a gift tax charitable deduction for the amount of the transfer that is attributable to the charitable beneficiary. One benefit is it allows you to pass a larger amount of your estate to your grandchildren without the need to pay generation skipping transfer tax that is normally required.

Qualified Small Business Stock Trusts

A Qualified Small Business Trust is another way to save on capital gains for those business that qualify. In fact it allow a 100% exclusion from federal tax on the first $10M of capital gain when the stock is sold.

The requirement are as follows:

(i) The entity has to be a US domestic C-corp.
(ii) Stock holder must have held the stock for a minimum of five years.
(iii) After September 27, 2010, the stockholder must have acquired the original stock price, in exchange for cash or property other than cash or stock, or services.
(iv) The aggregate gross assets of the corporation that issued the stock cannot have exceeded $50 million at any time before (and including the time immediately after) the issuance of the stock to the taxpayer. This is generally measured by the corporation’s adjusted tax basis in those assets.
(v) During substantially all of the stockholder’s ownership period, at least 80 percent of the corporation’s assets must actively be conducting one or more qualified trades or businesses.
(vi) The corporation must not have engaged in redemptions of its own stock during specified periods before or after the date of issuance of the stock to the shareholder.
This technique is very effective and can be used individually and in trusts. We are able to set up multiple trusts depending on your situation. The ideal time to use this technique is before c-corp is sold or before an IPO.