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Charitable Remainder Trusts NO MORE CAPITAL GAINS TAX Those who are waiting for the Obama Administration

to pass a bill reducing capit al gains taxes, are very patient indeed. But there is a way to avoid capital gai ns taxes altogether, reduce or eliminate estate taxes, reduce your income taxes, and protect your assets from creditors; all in a manner that is not only legal, but is encouraged by the Federal government. What is this magical tool, that se ems almost too good to be true? The Charitable Remainder Trust. Suppose a person, we will call him Taxpayer, intends to sell a capital asset(s); real estate for example, but it may be stocks, bonds, precious metals, gemstone s, or any other capital good. Suppose further that this capital good was purchas ed for $50,000 and is now worth $100,000, amounting to a potential capital gain of $50,000. Suppose now that Taxpayer goes ahead and sells the property, taking his $50,000 capital gain. Assuming Taxpayer is in the 28% tax bracket, Taxpayer will pay $14,000 in capital gains taxes, and will have $86,000 for future invest ment. It must also be noted that Taxpayer's $86,000 is still in Taxpayer's estate, and is subject to creditor's claims and to estate taxes when he dies. If Taxpayer d ies single, and his net estate is valued at $686,000 his estate taxes will be ap proximately $32,000, meaning that on the $100,000 sale, his heirs will net $54,0 00. On the tax on ill be ubject other hand, if Taxpayer lives and invests his $86,000, Taxpayer will pay the investment income. If his return is 10%, or $8,600 per annum; taxes w $2,408, leaving him at the end of one year with a sum of $92,192; still s to lawsuits and estate taxes of a minimum 37% on anything over $600,000.

Now let's look at Taxpayer's brother, Wiseguy. Wiseguy purchased a similar prope rty at a similar price and sold it at a similar price. The difference is that be fore he sold it, Wiseguy moved his property into a Charitable Remainder Trust, o f which Wiseguy is the trustee, so that it was the trust that actually sold the property. The result is that Wiseguy pays no capital gains taxes, because he did n't sell the property; and the trust pays no capital gains taxes, because the tr ust is exempt from taxes. Moreover, Wiseguy is entitled to take a deduction on h is personal income taxes in an amount equal to 30% or 50% of the value of the re mainder interest of the trust. Wiseguy, as trustee of the trust has $100,000 for future investment. It is important to note that Wiseguy's $100,000 is not in Wi seguy's estate, and is not subject to creditor's claims and estate taxes when Wi seguy dies. On the other hand, if Wiseguy lives, and as trustee of the trust, invests the $1 00,000, neither Wiseguy nor the trust, will pay tax on the investment income. Su ppose his return is 10%, or $10,000 per annum. At the end of one year, even afte r making the required payment to Wiseguy, as described below, the trust will sti ll have approximately $105,000 for future investment as opposed to Taxpayer's $9 2,192. Is this too good to be true? No!! The concept is simple; the person wishing to a void capital gains taxes simply donates the property to a Charitable Remainder T rust, retaining control over the property as Trustee. The donor takes a charitab le deduction on his personal income taxes, and the trust pays no taxes on the sa le of the property if and when it is sold. But there are tradeoffs that must be taken into consideration. The tradeoffs revolve mainly around the issue of who i s to be the beneficiaries of the Charitable Remainder Trust. Catch No. 1. There must be at least one non-charitable beneficiary; and the non-charitable be neficiary(ies) must be paid an annual payment from the trust. Depending on the c

haracterization of the funds paid to the non-charitable beneficiary(ies), this p ayment may be taxable. This "catch" may in fact be a blessing for those who need the income from their property. Catch No. 2. The remainderman, that is, the beneficiary that ultimately receives the property remaining in the trust when the non-charitable beneficiary(ies) pass on, must b e a charitable institution as defined in Internal Revenue Code, Section 170(c). This catch can easily be overcome as described below. There are essentially two kinds of charitable remainder trusts; the charitable r emainder annuity trust and the charitable remainder unitrust. The differences in the two types of trusts involve the way the mandatory annual payment is made to the non-charitable beneficiary(ies). The differences in the payout methods make for some interesting planning opportu nities. These opportunities, as well as, further details of the workings of char itable remainder trusts will be examined below. For now, suffice it to say that the biggest drawback in creating a charitable remainder trust is that the childr en, if they know about it, are likely to scream foul, because upon the donor's d eath, anything left in the trust will go to the charity named in the trust, and not to the children. That could obviously put a crimp in the children's plans. The solution is fairly simple. Simply establish an irrevocable life insurance tr ust, funded with a life insurance policy on the life of the Donor, approximating the value of the property transferred to the charitable remainder trust, with t he children as beneficiaries. The policy is owned by the trust, so it will not b e included in the Donor's estate for estate tax purposes; and the proceeds will not be taxed as income when it goes to the children. This latter strategy may al so be used by persons unable to establish an estate, but nevertheless want to le ave something, or something extra, when they pass on. A second solution would involve setting up your own private foundation to act as remainderman to receive the proceeds of the charitable remainder trust. A priva te foundation may be established to accomplish almost any good cause, i.e. resea rch, education, charity, etc. It is relatively simple to do, and it would permit your children or other heirs to control the foundation for their lifetime and t o earn income from it. Payments to Non-charitable Beneficiaries. At least one non-charitable beneficiary must be named to receive taxable annual payments from the trust for the life of the beneficiary or for a term of not mor e than twenty years. This is how the government assures itself that it will rece ive at least some tax revenue. Typically, the Donor will name himself and/or his spouse as the non-charitable beneficiary; but if he wishes, he may name his chi ldren instead of himself or in addition to himself and his spouse. The differenc es between the two kinds of Charitable Remainder Trusts, the annuity Trust and t he unitrust, make for some interesting planning opportunities. Amount of Payout. The major difference between the two kinds of trust, is that the annual payment from the annuity trust is at least 5% of the initial net fair market value of th e trust property; whereas the annual payment from the unitrust is at least 5% of the net fair market value of the trust property as revalued each year. This, of course, means that the payments from an annuity trust are fixed and the payment s of unitrust will fluxuate. Accordingly, the choice may be made, depending on t he needs of the Donor, or his outlook for the economy. The payments from a unitr ust are likely to keep pace with inflation, but if the Donor is dependant upon t he income and would have difficulty with reduced payments in a deflationary time , the annuity trust might be more suitable.

With either type trust the payments must be made for the lifetime of the benefic iary(ies) or a term not to exceed twenty years. If a fixed term is chosen, the t rust may be drafted so that if the beneficiary passes away before the term has e xpired, his payout may go to his heirs for the balance of the term. At the end o f the fixed term, or when the last beneficiary passes on, the remainder in the t rust will go to the designated charity. Taxation of the Payout. Taxes to the beneficiary are, of course, computed in such a way as to maximize r evenue for the government. Distributions are characterized according to the char acter of the trust's income. For example, a distribution is considered to be ord inary income to the extent of the trust's ordinary income, and all undistributed ordinary income from previous years. When all ordinary income is exhausted, inc ome is considered to be capital gains, to the extent the trust had capital gains ; next is "other income" and finally, if all income is exhausted, the distributi on would be considered to be a payout of trust corpus. Alternative Remaindermen. The trust instrument must provide for an alternative charity, to be the benefici ary in case the designated beneficiary does not qualify as an organization descr ibed in I.R.C. 170(c). But one of the many factors that make this whole strategy so attractive, is that the trust instrument may permit the Donor to retain the right to remove a designated remainderman and name another qualified organizatio n in its place. This means that if the Donor has always had the intention of set ting up his own charitable foundation, but hasn't gotten around to it yet, he ca n go ahead and name any qualified charity for now, and then when his own foundat ion is in place, he can remove the designated remainderman, and name his own fou ndation as the charitable beneficiary. Conclusion. While the scope of this article does not permit an exhaustive discussion of all the details and nuances of charitable giving, it should be evident that both typ es of trusts offer substantial tax and practical benefits to the Donor. Given th e relatively low cost of implementation, it is obvious that the immediate tax sa vings, along with the long term benefits, are more than enough to offset the cos t of creating the trust and any inconvenience raised thereby. Charitable remainder trusts: How the wealthy give it away and get it back By Lou CarlozoSeptember 30, 2011 inShare.capital gains charitable giving family finances Personal finance philanthropy taxes Though he first attended the Hollywood Bowl more than 30 years ago, Ron Moormeis ter remembers well those Los Angeles Philharmonic concerts. His voice waxes rhap sodic as he recalls the lineup: Mandy Patinkin, Julie Andrews, a Tchaikovsky Spe ctacular complete with the bombastic 1812 Overture. So when he hit it big in 1995 selling his insurance brokerage firm at age 49 he decided to help the orchestra and to get a tax benefit too. He used a charitabl e remainder trust, or CRT, a creative strategy that allowed him to give away his money, yet still derive funds from it based on a mix of tax deductions and inve stment. He started the trust with about $350,000. I had to get used to the idea a little bit, says Moormeister, 64. I thought, Gosh, do I want to give away this money? But I wasnt just giving it away. It was going to work well for me, for others and for my family. He also wanted to protect his assets from the claims of creditors or l awsuits, equally important factors in his decision to implement a CRT.

So far, all has worked out well. Moormeister set up his CRT with the help of Sim on Singer, principal and founder of TheAdvisor Consulting Group in Encino, Calif ornia (pictured). Under the trust guidelines, Ron guarantees that 25 percent of funds go to the Los Angeles Philharmonic. Yet in setting up the trust, Ron estim ates that hes saved at least $250,000 in tax deductions over time. His initial in vestment was sheltered from federal and state taxes, and trust money thats invest ed grows tax free, much as it does in a retirement account. This means Moormeister can make money off the CRT without expensive tax conseque nces. I could use an investment counselor, but I control the investments myself, h e says, and I can invest in virtually anything. Simply defined, a charitable remainder trust allows you to transfer cash or asse ts to the trust from which you may receive income for life or, if you prefer, a fixed term not to exceed 20 years. The income can be paid over your life, your s pouses life and even the lives of your children and grandchildren. (The guideline s are outlined in IRS code section 664.) In essence, the trust takes advantage o f the tax-exempt status of the nonprofit it benefits. But experts warn CRTs demand a high degree of planning and attention to the fin e points of tax law. There are many, many tricky rules that apply to charitable r emainder trusts, says Jonathan Blattmachr, a director of Eagle River Advisors in New York City. So you have to go to people who know how to do it, and can continu e to monitor it. Its common for a lawyer, a financial planner and an accountant to take part in setting up a CRT. Whats more, CRTs are irrevocable; once you set it up, it cannot be terminated, sa ys Dan Nigito, CFP, author of The Power of Leveraging the Charitable Remainder Tr ust . Your desire to create a charitable legacy should override the tax incentives . The ideal candidate would have highly appreciated assets say from the sale of pr operty or a business that are not a core nest egg, but rather money set aside ex clusively for the CRT. You have to have sufficient assets to give away, and the a ssets have to make sense, says Grant Rawdin, president of Wescott Financial in Ph iladelphia, Pennsylvania. Because CRTs are little known outside the financial and estate planning communit y, you also need someone whos in the know. Moormeister had no idea what a CRT was until he talked to Singer. The most difficult part is not the strategy itself, but people getting the absolu te clarity getting their heads around it, Singer says. If you set up the trust cor rectly, theres far more money to be made with the reduction of taxes than the inv estment income, largely because the returns on investment from a CRT may be flat from year to year, depending on market conditions. Indeed, the returns on CRT investments pretty much follow the rest of the market and we all know how much malaise there is on Wall Street these days. A CRT does not make a lot of sense in a low-interest rate environment, says Susan Colpitts, executive vice president and co-founder of Signature in Norfolk, Virginia. She c ites the fact that investment tax breaks are pegged to the Applicable Federal Ra te (AFR), currently 1.4 percent, as an assumption of how the trust will grow ove r time. So in todays environment, the tax deduction will be very small because the growth rate is deemed to be so much lower than the payout rate. Yet with all the talk of closing Bush-era tax loopholes, the Buffet Rule and the possible expiration of generous estate and lifetime gift tax exemptions in 2013

, CRTs look set to maintain formidable tax advantages, since they can shelter hi ghly appreciated assets from a one-time tax hit on the federal and local levels. They will actually look better if and when the Bush Tax Cuts expire, Blattmachr sa ys. If were not talking a 15 to 16 capital gains tax, but a 24 percent capital gai ns tax, then the charitable remainder trust shines. For Moormeister, the best advantages outweigh anything on an accountants spreadsh eet. These days when he visits the Hollywood Bowl, hes got a garden box about 16 rows back, left of center, where he loves to hold court with family and friends. (He pays full price for his seats.) The outdoor concerts still thrill him much as they did three decades ago, but he gets an extra rush knowing his good financ ial fortune will help the music play on. I have no musical ability whatsoever but I enjoy the heck out of it, says Moormeis ter, who adds with a bit of impish humor: It was a somewhat selfish thing I did. The Philharmonic hasnt benefitted from it yet. Nothing comes to them until I leav e the planet.

Tax Savings and Asset Protection With Charitable Trusts "The CRT provides one of the few true win-win scenarios remaining in financial planning." Charles J. McLucas, Jr., CPA Asset Protection From Future Creditors A Life Income Annuity Avoid Capital Gains Tax An Income Tax Deduction Multiple Income Distribution Alternatives Benefits of A Charitable Trust * A substantial charitable contribution * An Alternative To A Deductible Pension Plan * Protection From A Government Pension Grab * Provide Funds For College Expenses Of Children Or Grandchildren * Avoid Or Reduce Future Estate And Gift Taxes * Protection From Tax On Inflationary Income * Continued Investment Management * Use Life Insurance To Replace Assets For Your Heirs If it weren t for a great void of other forms of tax shelter, there wouldn t be nearly as much interest in the tax benefits of the charitable remainder trust (C RT). But ... because of the dearth of other tax saving devices, the CRT has beco me one of the really HOT financial planning tools for Americans in the 1990s. Proponents claim it will do virtually everything anyone could ever want. Accordi ng to the more exuberant advocates, you can use a CRT to avoid income taxes, to avoid capital gains taxes, to avoid estate and gift taxes and to protect your as sets from the claims of every form of predatory creditor. Cooler heads argue that when you examine the details and run the numbers, it s j ust another of a wide range of financial options. Those who make their living he lping taxpayers to establish and administer the charitable trust are the most vo cal in arguing that this device is not a tax dodge or tax "loophole". You (or so meone in your family) gets an income for life or for a term of years. Later, a c harity gets what s left. In many ways, the charitable remainder trust is an alte

rnative to a life income annuity with an insurance company, but with a few extra bells and whistles and with a lot more tax benefits.

Asset Protection From Future Creditors A charitable trust is probably the strongest form of asset protection available without resorting to an offshore trust Once you make a valid transfer to a charity or a charitable trust, you no longer own the property and it s not available to your creditors. Although the future income you have a right to receive can be attached by future creditors in some s tates, that problem can be avoided by making your spouse the income beneficiary. Of course, you wouldn t do that if you had any concern about the permanence of your marriage. However, there are some technical hurdles that must be overcome t o be sure the asset protection benefits will hold up to a challenge by a determi ned judgment creditor. I ll discuss those in more detail in the next issue of AP S.

A Life Income Annuity If you would ever be attracted to the idea of a life income retirement annuity f rom an insurance company, you should first give serious consideration to a life income annuity from a charity or charitable trust. Basically, you either substit ute a charity for an insurance company or you establish a trust in which the cha rity gets what s left after all the income beneficiaries are gone. The main drawback in exchanging some assets to a charity or charitable trust for a life income annuity is the cost of setting up and administering the charitabl e remainder trust. Without a significant amount (over $150,000 of deferred gain) , the cost may take away the tax and financial benefits. A second major drawback of this financial tactic is the complexity.

Avoid Capital Gains Tax One of the biggest advantages of a charitable income arrangement is that you can give a charity some highly appreciated property and receive an annuity based on the value of the property, without being diminished by the capital gains tax. In addition, once the charitable trust is in place, the charitable trust can buy and sell investments at a profit without concern for depleting your gains becau se of the capital gains tax. Of course, the reverse is true in that you can t re cover any taxes on capital losses. In this respect, the charitable trust is much like a variable annuity or a retirement savings plan.

An Income Tax Deduction One of the most heavily promoted advantages of the charitable remainder trust is the income tax deduction available to the donor. When you contribute property t o a charitable remainder trust, you are entitled to deduct the "present value of the future remainder interest" on your tax return in the year of the donation. What s the "present value of the future remainder interest"? Essentially, it s t he value of the property, minus the value of the retained income. How do you det ermine the value of a retained income? Basically, you have to go through a series of calculations, using tables prescri bed by the IRS. According to the IRS mortality tables, the remaining life expect ancy of either a male or female at age 65 is 20 years. If you contribute $200,00 0 to a charitable trust in exchange for a 5% annual payment of $10,000 per year, the amount of your tax deduction will be about $100,000. That s the value of th

e gift minus the present value of the 20 years of income. If you are in the top federal bracket of 39.6%, you will recover $39,600 in taxe s from a contribution of $200,000 to a charitable trust, assuming there are no o ther restrictions or limitations on the amount of your deduction. The longer the life expectancy of the income beneficiary (or the more beneficiaries there are) , the smaller the income tax deduction. The amount of the tax deduction also depends on the current interest rate on mid -term federal bonds. Actually, it s based on 120% of the "applicable mid-term fe deral rate" (AFR) for the month of the contribution or either of the two previou s months. Thus, if the lowest AFR for the three months is 6%, the rate that must be used to compute the tax deduction would be 7.2%. Frankly, I believe many commentators and advisors place excessive emphasis on th e income tax deduction that s available to the donor. When you run the numbers c omparing the charitable trust to other alternatives, you will discover that the tax deferral is a far greater financial benefit than the tax deduction. By leavi ng some of your money to a charity, you can move your family wealth to your chil dren or grandchildren by using the charitable trust as a conduit. Look at it thi s way. Would you rather give the IRS up to 55% of your estate or would you rathe r leave those same dollars to a favored charity? Even though the income tax deduction is often over-valued, the Congress decided in 1997 that there had to be some minimum amount that would go to the charity in terms of the present value of the funds contributed to the CRT. They set that m inimum at 10%. The practical effect of that is that the charity has to get at le ast 10% of your assets, plus all of the income on those assets. The rest can be paid out to you or other income beneficiaries as annuity payments. The 1997 law also established a maximum annual payout rate of 50% per year.

Multiple Income Distribution Alternatives The subject of charitable trusts is very confusing to most people and to many fi nancial and tax professionals. Part of the reason is because there are so many v ariations on the theme. That s an advantage because of the many ways that a char itable trust can be structured to meet the needs of different donors. You can establish a CRT to ..... pay you a fixed income for your lifetime, pay you an income for a fixed number of years, pay an income to you and your surviving spouse, pay an income to your children (subject to the 10% minimum to charity) or other combinations. The income can be fixed, variable or deferred, depending on the type of arrangem ent you select. You can use a charity to secure a lifetime income, to get an inc ome tax deduction and to get an estate tax deduction - in varying combinations. Benefits of A Charitable Trust A substantial charitable contribution Many charitable planning advisors would say that the satisfaction of making a su bstantial contribution to a favored church, school or other charity should be th e primary motive for making contributions to a charitable trust. Without some si gnificant desire to help a charitable organization, it s hard to let go of a lar ge amount of money while you are living. In addition, the IRS can challenge your tax deduction if they can show that your main motive was to save taxes. An Alternative To A Deductible Pension Plan If you are self employed, you might put some of your profits into a Keogh plan o

r other deductible retirement savings plan. In addition to getting a deduction f or the money you put into the plan, the income earned by the plan is tax deferre d until you retire. At that time, you can draw the money out or you can convert all of it into a life income annuity. One alternative to that arrangement is to invest after tax money in a tax deferr ed annuity. When you retire, you can draw out all the money and pay taxes on the deferred income or you can convert the accumulated amount into a life income an nuity. A third alternative is to contribute your money to a "charitable remainder unitr ust with net income makeup" (NIMCRUT) provisions designed to permit the trustee to pay out the lesser of the income of the trust or a percentage of the trust as sets. When the annual income is less than the "regular" payout, the trust can re quire that the distribution must be made up in future years, when the trust has sufficient income. Thus, the trustee can invest the NIMCRUT assets to achieve gr owth instead of current income. When you retire, the trustee can switch the inve stments to generate income for distribution, including extra amounts to make up for previously deferred distributions. Thus, the NIMCRUT can provide tax deferre d accumulations, like an annuity. In addition, contributions to a NIMCRUT are partly tax deductible, depending on your age at the time of the contribution. The catch is that a substantial amount will end up going to a charity instead of being paid to your heirs. However, yo ur spouse and/or your children can also be an income beneficiary of the CRUT, bu t that will reduce the income tax deduction that you can take. And, the 10-% min imum present value for the charity sets limits on the number of years that the i ncome can be paid to successive beneficiaries. Protection From A Government Pension Grab A number of financial commentators have expressed concern about how the governme nt may resort to various methods to get money from the huge pool of untaxed pens ion assets. Other commentators have pointed out that the government can easily r equire pension managers to invest a minimum portion of the pension funds in "spe cial" government bonds. These concerns arose because some of the members of the Clinton Administration were making public comments (before the 1994 elections) a bout using pension money to provide funding for public programs. Those comments haven t been made in a couple of years, but the prospect continues to cause some concern among many of who have little trust in our government officials. As a result of this concern, I ve had a number of phone calls from my subscriber s who have asked for my advice on how to get their money out of a pension plan o r IRA with the minimum tax burden. Those who choose to take some or all of their money out of a pension plan or who stop putting money into the plan, will end u p paying more taxes. The fear of a government pension grab will cause a lot of p eople to respond in a way that will result in more tax revenue for the governmen t. Do you suppose our elected officials are so diabolical that they would engage in disinformation in order to create an hysteria that would result in early dis tributions from pension plans that would produce a short term windfall for the g overnment? It s beyond the scope of this article to dwell on the extent to which the govern ment may or may not resort to some sort of "pension grab". But, if you are conce rned, one partial solution is to move your money out of the public pension syste m into a private "pension" system, via a charitable remainder trust. At age 50, a single taxpayer can deduct about 29% of the money put into a U.S. C RUT with a 5% annual payout rate. That would reduce the tax bite on any money th at you don t put into a deductible retirement plan. At age 65, a single taxpayer can deduct about 50% of any money that is drawn out of an existing retirement p lan and contributed to a CRUT. The trustee of a CRUT can invest the assets so th at there will be no current income to distribute until you are ready to retire -

meaning when you need the income. Provide Funds For College Expenses Of Children Or Grandchildren What if you could set aside a college fund for your children that would grow tax free until they reach college age? What if you could use appreciated assets to fund the trust without having to pay any capital gains tax? What if the assets i n the fund were safely removed from the claims of any future creditors? What if the income from the trust is used to pay an income to your children as long as t hey stay in school and it s taxed to them in their lower tax brackets while they attend college? And what if you could get a substantial tax deduction for the m oney that you put into a trust to pay for your children s college expenses? Some advisors claim a CRT can be used to secure all of these benefits. To do thi s, the charitable remainder trust is set up for a term of years. It can be funde d with appreciated assets, thereby avoiding the capital gains tax. The income is distributed for the years the children are in college. However, all of the mone y will not be available for college expenses. Some of it must be left in the tru st for the charity at the end of the selected term of years. So, unless you have a genuine desire to help a charity, the tax benefits of this arrangement won t be enough to make this attractive. Other alternatives for tax favored education would result in having more money available for education. Avoid Or Reduce Future Estate And Gift Taxes It s arguable whether there s a personal or family benefit in avoiding the estat e and gift tax when the related assets don t go to your children or grandchildre n. However, when you analyze the impact of the estate and gift taxes, you may di scover that your children will only get a few cents on each dollar in your estat e. At the very least, the real cash cost to your heirs may be very small compared t o the money you can provide to a charity. For example, if you are in the 60% est ate tax bracket, any gift to a charity is only "costing" your family 40% of the amount left to the charity. If you sell appreciated property, the federal and st ate capital gains tax might take 33% of your gain. If the IRS gets 60% of the re st, your children end up with only 27% of the unrealized gain. By giving the app reciated assets to a charity, the real cost to your children is 27% to 40% of th e value of the donation. Of course, if you live out your life expectancy, the after tax proceeds from sel ling your property can be invested and will most likely add to your total estate . Here s an example that compares a charitable gift to a sale, where the donor l ives another 20 years. If you sell $100,000 of appreciated stock that cost $10,000 and you are in the 2 0% capital gains tax bracket, you would end up with $80,000 after taxes. If you then invest that in 6% bonds, your after tax return would be 4%, if you are in t he 33% federal and state tax bracket. After 20 years, the accumulated income wou ld be $95,280. The $80,000 bond plus accumulated income would increase your esta te by $175,280. If the estate taxes were 50%, that would leave $87,640 for your children and grandchildren after all taxes. By giving the stock to a charitable trust, investing it at 6% and paying out 6%, you would begin with a fund of $100,000 instead of $80,000. Your annual income would be $6,000 before taxes, and $4,000 after taxes. Your accumulated income wo uld be $119,100 instead of $95,280. In addition, if you were 60 years of age and the only income beneficiary of the CRT, you would get an income tax deduction o f about $35,500, which would save you about $12,000 in income taxes. If that wer e invested for 20 years at 4% after tax, it would equal $26,300. That would leav e $145,400 for your estate and $72,700 for your children. Your $100,000 charitab le gift has actually cost your children only $3,985, based on these assumptions.

Protection From Tax On Inflationary Income One of the most subtle benefits of a charitable remainder unitrust is that you h ave the equivalent of a variable annuity to protect the purchasing power of your income from erosion by inflation. The yield on conservative, fixed income inves tments follows the inflation rate. As the rate of inflation increases, the rate of interest on new bond issues also increases. Thus, where a corporate bond migh t pay 3% to 4% without any inflation, when the inflation rate is 4%, newly issue d bonds will usually pay 7% to 8%. With a charitable remainder unitrust (CRUT), you make an initial decision about the percentage of assets to be distributed to you each year. The minimum percent age is 5%, but you can select a higher payout rate if you wish (up to a maximum of 50%.) To secure the maximum protection from inflation, you should select a pa yout rate equal to an inflation free rate of return on a portfolio. (A moderate risk rate of return without inflation would be about 4% to 5%.) Assume you put $100,000 into a CRUT and you selected a 5% rate of payout. If the CRUT earns 8%, you will get $5,000 after the first year. The extra $3,000 stays in the CRUT - tax free - and increases the value of the assets. In the next yea r, your 5% payout will be based on an asset value of $103,000. Your 2nd income p ayment will be $5,150. If the CRT makes 9% in the second year, the total income would be $9,270 and the balance in the CRUT after two years would be $107,120. T hen, if the rate of inflation pushes interest rates up to 10%, the CRUT will mak e $10,712 in the third year. The third payment would be 5% of $107,120. The bala nce after five years would be $124,004. The key to this arrangement is that the extra $24,004 of income is not subject to income taxes. If you adjust the number s to eliminate the effect of the inflation, your annual payments would be very c lose to $5,000 per year. Starting Balance Annual Yield Annual Income Sub-Total Annual Payout Ending Balan ce Year 100,000 8.0% 8,000 108,000 5,000 103,000 1 103,000 9.0% 9,270 112,270 5,150 107,120 2 107,120 10.0% 10,712 117,832 5,356 112,476 3 112,476 10.0% 11,247 123,723 5,624 118,099 4 118,099 10.0% 11,810 129,909 5,909 124,000 5 Continued Investment Management One of the controversial aspects of the charitable trust is the question of whet her the donor can be the trustee. The answer is a qualified "yes; but." Yes, you can be the trustee of a charitable trust even if you are an income beneficiary of the trust. But, if you want the trust to permit the trustee to defer distributions by inves ting in growth type assets, I ve been told you can t be the trustee. And, it s d oubtful if you are qualified to do what a CRT trustee is required to do. Even ma ny bank trust departments aren t qualified to be trustees of a CRT. However, the re is a company that provides technical support to donors who want to be trustee s of their CRT. They market their service through a national network of advisors with special training in the use of charitable trusts and other charitable gift instruments. The name of the organization is Renaissance Inc. Their address is 11595 N. Meridian Street, Suite 250, Carmel, Indiana, 46032. (317-843-5400) Use Life Insurance To Replace Assets For Your Heirs One of the common objections to putting money or property into a charitable trus t is that the taxpayer wants to leave the money to his or her children. The most common solution to this problem is that you can usually use the income tax savi ngs (from deducting the present value of the deferred gift to a charity) to buy enough life insurance to replace the assets that would have otherwise gone to yo ur heirs. A better solution would be to make your decision about life insurance

in the context of an overall estate and asset protection plan. First decide how much you want to leave to your children. Then, you can decide what to do about t he rest. When you are able to decide how much you want to leave to your children , you can then dis-inherit the IRS with a charitable trust and still have a secu re income for as long as you live. Further details about protecting your assets from future lawsuits are available in our subscriber s web site. Changes in the tax laws and various federal and s tate laws affecting various asset protection devices are provided in our monthly newsletter on Asset Protection Strategies.

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