Non Taxable Estate CRUT

Non Taxable Estate CRUT

Forum topic posted in Forum on 9 September 2008| 8 comments
audience: | last updated: 9 September 2008
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CAnselmo's picture
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Joined: 05/04/2008
Points: 105
If a client's estate is only $2,000,000 and well under the estate tax exemption limit, but client wants to use similar payouts like a CRUT to lifetime beneficiaries...what is the harm in just having a distribution pattern in her living trust, that upon her death the named beneficiaries, get X% a year for life, then upon the death of the last surviving beneficiary, the balance gets paid to various named charities? If you have a non-taxable estate, why mess with the CRUT regulations?

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Joined: 10/05/2005
Points: 165
Non-Taxable Estate CRUT
Does the donor have any assets in an IRA, 401(k), or similar tax-deferred account? If so, the CRUT can be named the beneficiary and there will be no shrinkage to income taxes. On the other hand, if the CRUT is named as beneficiary but is non-qualified, it will have to pay taxes on the income -- and at the trust's high tax brackets.
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Joined: 10/14/2004
Points: 110
#1 by Sheila Hard Member
#1 by Sheila Hard Member Profile: Consultant Sacramento, CA Sheila Hard (Consultant) Consultant Non-Taxable Estate CRUT Does the donor have any assets in an IRA, 401(k), or similar tax-deferred account? If so, the CRUT can be named the beneficiary and there will be no shrinkage to income taxes. On the other hand, if the CRUT is named as beneficiary but is non-qualified, it will have to pay taxes on the income -- and at the trust's high tax brackets. True, but trust will only pay taxes on undistributed income. If trust says, "Pay all income to life tenant," nothing retained. If trust says "Pay X% to beneficiary," and trust income is not greater than X%, nothing retained.
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Joined: 05/04/2000
Points: 15
Non-Taxable Estate CRUT
The CRUT will (or may) be much more valuable to the charity than just lifetime distributions and remainder to charity at death. The CRUT will not pay tax on capital gains (although the beneficiary will if the capital gains are included as a portion of the unitrust amount), and the taxable trust will. Second, IF the CRUT has ordinary income in excess of the CRUT payout (admittedly this has become difficult given the 5% minimum payout for a standard CRUT rather than NIMCRUT) the CRUT will not pay tax on the excess income. The upshot will be more for the charity, and of course if the investment performance should continue to exceed the payout percentage, the corpus will grow and so will the distributive amount for the beneficiaires. What is lost is the ability to make discretionary distributions to beneficiaries in case of emergency needs, etc. That is the other reason not to fund the CRUT during lifetime -- one may actually NEED the principal.
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Joined: 10/14/2004
Points: 110
Timing of distribution to charity
I wrote an article about what I called the "NON-CRUT" a few years ago, for the ACF newsletter. I've asked Kim Kur to try to track it down. With multiple beneficiaries, you probably want to avoid waiting until the last beneficiary dies before distributing to charity. It makes for awkward Thanksgiving dinners, when brother looks across the table and thinks, "If my sister dies, my income doubles." Two solutions: establish a separate trust for each beneficiary, or establish one trust and say that as each beneficiary dies, a fraction of the trust (on the date of distribution) goes to the charity. The fraction is 1 over (1 + # of beneficiaries still surviving).
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Joined: 10/14/2004
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Article from AZ Community Fdn newsletter
Kimberly Kur found it for me -- I wrote it in 2001! My, how time flies.... Thanks, Kim! Long, but here goes (footnotes deleted): THE
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Joined: 03/05/2001
Points: 15
Non-Taxable Estate CRUT
Perhaps this is stating the obvious, but the overwhelming majority of charitable gifts are made primarily because the donor has charitable intentions, not because of tax savings. In this case, a CRUT is an outstanding way to balance the donor's desire to benefit her heirs and the charities of her choice. The discussion topic points out the importance of including ALL of an individual's needs (including family, charitable and tax implications) in evaluating an appropriate course of action in estate planning.
CAnselmo's picture
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Joined: 05/04/2008
Points: 105
Contingency
Could make such pattern contingent on the estate being non-taxable, if taxable...it could then fund a standalone CRUT. Christopher A. Anselmo Attorney & CPA Anselmo & Company, LLC 4161 Ridge Road Cleveland, OH 44144 (216) 485-1040 Chris@Anselmo.com
Brent Dunn's picture
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Joined: 03/28/2002
Points: 45
Non Taxable Estate CRUT
If the clients estate is over $2 Million, she probably has at least $100,000 of suitable assets to contribute to the trust while living. If everything is done on a testamentary basis, she would forfeit all of the traditional lifetime financial and tax benefits. If funded during life, she will gain valuable experience and may refine her plan in various ways. A CRT has great "up front" tax benefits, but the ongoing tax benefits are also important. If a non-qualified trust pays a unitrust amount to the heirs, the trust itself will presumably pay taxes on any income earned over the unitrust amount. Of course this would be avoided with a tax exempt qualified CRT. A CRT would probably grow more effectively, benefiting all beneficiaries. With a $2 Million exemption (possibly permanently increasing next year), federal estate taxes may or may not be an issue. State inheritance taxes may still be a significant issue. Depending on the ages of the beneficiaries, the estate could have a significant deduction for the present value of the remainder interest for a qualified CRT.
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