|
CHARITABLE LEAD UNITRUST
A donor may transfer assets to an irrevocable Charitable Lead Unitrust (CLUT) - sometimes referred to as a Charitable Income Unitrust. The trust then pays a fixed percentage of its assets to a qualified charity for either a set number of years, or the lifetime of individuals. When the term of the trust has ended, the remaining assets are distributed to the donor, his or her spouse, heirs, or other individuals.
Valuation of assets is required every year to determine the amount of the payment for the year. Payments to charity will vary from year to year, depending upon the investment performance and expenses of the trust.
After the lead (or income) period has expired, if the beneficiary of the trust is other than the donor, or his or her spouse, there may be a taxable gift. The gift tax would be based on the present value of the beneficiaries' right to receive the trust remainder at some future time. This calculation is dependent upon the term of the trust, the amount payable each year to the charity, and the AFR (applicable federal rate) at the time of the transfer.
GRANTOR VS NON-GRANTOR TRUSTS
The tax treatment of the trust varies, depending on who is considered the trust owner:
In a grantor trust, the donor is considered the owner of the trust (taxable on the income under the grantor trust rules of IRC Sec. (671-677) and is allowed a tax deduction for the income passing to the charity. In a grantor trust, the assets revert to the donor or spouse at the end of the trust term.
In a non-grantor trust, the donor is not treated as the owner of the trust. The trust itself is permitted an unlimited tax deduction for the income passing to the charity. In a non-grantor trust, the assets pass to someone other than the donor or spouse at the end of the trust term.
Estate Tax Reduction
Most CLUTs are set up as non-grantor trusts, where the ultimate beneficiary of the trust assets is someone other than the donor or his or her spouse. Such CLUTs provide no income tax deduction to the donor, but do allow the transfer of assets to children or grandchildren, with substantial valuation discounts.
The CLUT is an excellent way for the affluent individuals to meet charitable obligations as well as make discounted, deferred transfers to their heirs.
FAMILY LIMITED PARTNERSHIP (focusing on estate reducing and children’s endowment)
Family limited partnerships (FLPs) have become a popular planning tool for the high net worth individual. A FLP has the following advantages:
1. The parents can give away wealth and still retain control;
2. Transfers can be made at substantial discounts as compared to the value of the underlying assets;
3. Restrictions can be placed on transfers by children;
4. There is some protection from creditors.
To form a FLP, there must be at least one general partner and one limited partner. Typically, both parents serve as general partners. They may start by owning all but a small portion of the limited partnership units. Over time the parents transfer by gift a significant portion of the limited partnership units to the children.
The availability of valuation discounts when dealing with partnership interests offers the opportunity to leverage the estate tax exemption and annual gift exemption by transferring a greater percentage of assets. The valuation discount is available for a minority interest in a business in terms of voting or control. It lacks the power to effect changes in policy, structure or strategy. For transfer tax valuation, minority discounts of between 15 and 50 percent are obtainable for such interests.
|
