TAMPA— March 15, 2023 — Members Trust Company (MTC), a nationally chartered trust company that provides trust and investment services to credit union members throughout the United States, today announced the appointment of Kenneth E. Lako as President and Chief Executive Officer.
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Many people may not realize that charitable planning intersects with estate and business succession planning. Combining a charitable strategy and the sale of a business is a great way for owners to minimize taxes and provide equity for the next phase of their lives.
Charitable remainder trusts were authorized by the 1969 Tax Relief Act. Since then, they have become common vehicles for charitable giving. High-net-worth and middle-class individuals look to the various forms of charitable trusts as a way to give more to their favorite charities while benefiting from tax deductions. In many cases, charitable trusts can even allow a person to make a charitable gift they might not otherwise be able or inclined to make.
By implementing a complementary charitable planning strategy, a business owner can:
- Reduce and possibly eliminate income, capital gains, and transfer taxes;
- Preserve wealth;
- Generate a reliable stream of income; and
- Protect assets from creditors.
Charitable Trusts come in two forms: Lead Trusts and Remainder Trusts. In both cases, the donor makes a gift to the trust. The trust makes regular payments for a period of time, then distributes the remainder at the end of the term.
How Do Charitable Lead Trusts Work?
A Charitable Lead Trust (“CLT”) provides a stream of income to one or more charities as the “lead” beneficiary. The trust can be set for a specific term of years or for the life of a person. After the income stream ends, the remaining balance will be distributed to other beneficiaries, like spouses, children, or other loved ones. For more information about trusts, grantors, and beneficiaries, see What is a Trust?
When establishing a Charitable Lead Trust, the grantor pays gift tax on the expected final distribution to family members. This is calculated by using the § 7520 interest rate in effect at the time of creation. If the trust assets grow at a higher rate than the § 7520 rate, the additional growth passes to the grantor’s family without any estate tax due. In other words, the grantor will pay less overall estate tax while donating to a meaningful cause.
How Do Charitable Remainder Trusts Work?
A Charitable Remainder Trust (“CRT”) provides a stream of income to one or more individual beneficiaries, while preserving its remaining balance for charity. Similar to the CLT, the CRT can be set for a term of years (up to 20 years for the CRT) or for the lifetime of an individual. After the income stream ends, the remaining balance of the CRT will be distributed to one or more qualifying charities. Then, the grantor will receive deductions for federal income, gift, and estate tax purposes.1
In order to qualify for these tax deductions, the CRT must pass the IRS’ 5% probability of exhaustion test—there must be less than a 5% chance the trust will pay out its entire principal to the individual beneficiaries using the IRS discount rate.
In the year the grantor creates the CRT, he or she also receives an immediate income tax deduction that is equal to the present value of the expected gift to charities. Generally, the grantor names himself or herself, if not the spouse, as the income beneficiary of the trust, in which case there are no gift tax issues.
Grantors of CRTs must choose between two forms of income streams: Unitrusts or Annuity Trusts.
To be designated as a beneficiary of a Charitable Lead Trust or Charitable Remainder Trust, the charity must qualify under section 170(c) of the Internal Revenue Code (IRC). Qualifying charities generally include 501(c)(3) organizations, but are not limited to churches, synagogues, religious organizations, civil defense organizations, fraternal societies, and other organizations that operate solely for religious, charitable, educational, scientific, or literary purposes. (IRC 170(c))
If the named charity loses its qualification under section 170(c), an alternate charity can be selected. The grantor may name alternate or successor charities and beneficiaries during the creation of the trust. However, the grantor may also leave the remainder beneficiary “open” by reserving the power to designate a successor beneficiary or charity after the trust’s formation.
Choose Wisely: The Importance of Selecting the Right Trustee
Given the complexity and longevity involved with a Charitable Trust, one of the most important decisions a donor can make is selecting a trustee. A corporate trustee can be completely objective, which is an important quality when there are—or may be—contentious family members. A corporate trustee has no vested interest in the income or the remainder of the trust and is in the best position to balance the interests of the various parties. Corporate trustees also have expertise in taxation and investments. There are other benefits as well:
• Professional asset management
• Legal proficiency to administer terms of trust
• Regulated entity; oversight & accountability
• Legal duty to act in clients’ best interest
• Perpetual appointment
• Capital & insurance
For more information about corporate trustees, see How To Choose a Trustee: 4 Key Considerations.
Members Trust Company as Trustee of a Charitable Trust
Founded in 1987 by America’s Credit Unions for credit unions, their members and the general public, Members Trust Company is the first national trust and investment firm providing financial stewardship, investment management, and trust services for both credit union and non-credit union accounts.
With our Main Street values comes Wall Street experience…without the ego or exorbitant fees. Our team of fiduciary administrators are highly credentialed and experienced. Our team of investment professionals hold the highest Chartered Financial Analyst® designation and have been continually recognized in the industry as subject matter experts in trust and investment solutions, big and small.
To speak with someone about Charitable Trusts, call us at (888) 727-9191 or visit https://memberstrust.com/contact.
External sources: (1992) Hoisington, W. The Truth About Charitable Remainder Trusts (How To Separate The Help From The Hype). The Tax Lawyer.1
Trust services provided by Members Trust Company, a federal thrift regulated by the Office of the Comptroller of the Currency. Trust and Investment products are not NCUA/NCUSIF/FDIC insured. May lose value. No financial institution guarantee. Not a deposit of any financial institution. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant.