Charitable Gifts from Revocable Living Trusts

At a Glance

Revocable living trusts (RLTs) are created during the grantor's lifetime and may be altered, amended or revoked by the grantor. Though such trusts are revocable during the lifetime of the grantor, they generally become irrevocable or terminate upon the grantor's death.

Revocable living trusts may offer many planning opportunities to grantors with suitable circumstances and objectives. RLTs can:

$image\bullet.jpg$ Manage assets during the grantor's lifetime

$image\bullet.jpg$ Reduce probate costs for trust assets that pass outside the probate estate upon the grantor's death

$image\bullet.jpg$ Dispose of trust assets following the grantor's death

$image\bullet.jpg$ Serve as a pourover receptacle for other assets at the grantor's death; for example, assets passing under the will, life insurance death proceeds, IRA and qualified retirement plan distributions

$image\bullet.jpg$ Conserve assets following the deaths of the trust beneficiaries, bypass estate taxation at their deaths, and pass income and principal on to successor beneficiaries

$image\bullet.jpg$ Protect (in most jurisdictions) assets from the reach of creditors of the beneficiaries, after the grantor's death, through anti-spendthrift provisions in the trust

$image\bullet.jpg$ Provide privacy, by shielding from the public eye, the grantor's dispositions of property (wills admitted to probate are public records susceptible to inspection)

Despite the many advantages of revocable living trusts (sometimes referred to as revocable inter vivos trusts), these planning tools will not benefit everyone. They will not remove assets from the grantor's gross estate for federal estate tax purposes, nor shift income to lower-bracket beneficiaries for federal income tax purposes, nor will they protect property from the creditors of the grantor.

An RLT should be established only after consultation with an experienced and qualified estate planning attorney who is well acquainted with the applicable laws of the appropriate jurisdiction. A good revocable living trust will be drafted to fit the individual facts, circumstances and objectives of the grantor, and of the grantor's beneficiaries.

$image\button1.jpg$ Click here for a graphic on How A Revocable Living Trust Works.

Tax Consequences of Revocable Living Trusts

Income Tax

A trust is a separate legal entity and due formalities with respect to trust property and trust operations should be carefully observed. Nevertheless, the trust is not a separate taxpaying entity during the lifetime of the grantor while it is still revocable. Tax law calls it a "grantor trust" and treats the grantor as the owner of the trust for federal income tax purposes. Income of the trust, including capital gains, is taxed to the grantor. It therefore offers the grantor no income tax advantages during his or her lifetime.

Gift Tax

Transfers to the trust will not be completed gifts, since the grantor has not parted with control of the property. However, any payments made out of the trust to individuals other than the grantor will be gifts, potentially subject to gift taxes levied on the grantor.

Estate Tax

Assets in an RLT will be included in the grantor's gross estate at death, because the grantor retained a power to revoke the trust (and often retains rights to trust income that will also taint the trust for estate tax purposes). Generally speaking, to avoid the estate tax, an irrevocable trust must be utilized.

Generation-Skipping Tax

If the grantor's grandchildren, or individuals deemed to be more than one generation below the grantor, are beneficiaries of the trust, the federal generation-skipping transfer tax may be applicable.

Naming the Trustee

The grantor may serve as trustee, with a successor trustee to follow upon the disability or death of the grantor. Such continuity permits trust property to bypass the probate process, avoiding probate costs and delays.

Because a successor trustee may administer the trust during the disability of the grantor, the possibility of expensive and potentially embarrassing guardianship proceedings with respect to the grantor is lessened.

Property owned by the trust and located in states other than the grantor's domiciliary state or state of of residence may also avoid the expense and trouble of probate in those states (referred to as ancillary probate proceedings).

Charitable Gifts from Revocable Living Trusts

Grantors may design their revocable living trusts so that charities are beneficiaries of the trust. The trustee may be directed to pay a charity a certain dollar amount at the grantor's death. Alternatively, the trustee may be required to pay a charity a percentage amount of the trust corpus, or the residue of the trust after amounts directed to other beneficiaries have been paid.

Following the grantor's death, an RLT may be converted into a QTIP trust, a charitable lead trust, or a charitable remainder trust.

Charitable QTIP Trust

A Qualified Terminable Interest Property (QTIP) Trust is a type of trust which qualifies for the estate tax marital deduction, although the surviving spouse only receives a "terminable interest" in the trust property. Frequently used in connection with second marriages, QTIP trusts must pay all their income at least annually to the surviving spouse.

The donor spouse is free to direct where the trust property will go following the death of the surviving (donee) spouse, including distributions to charity. QTIP property remaining at the death of the donee spouse generally will be included in the donee spouse's estate for estate tax purposes, but the estate tax charitable deduction could offset the tax.

Following the death of the grantor, the trust agreement would provide that all trust income would be paid to the surviving spouse annually or more frequently. The trust document could also provide that the surviving spouse could receive trust principal necessary for the spouse's health, education, maintenance or support. Following the death of the surviving spouse, the residue would be paid to charity.

The value of remaining charitable QTIP property at the time it is transferred to charity will be deductible for estate tax purposes.

Charitable Lead Trusts

When all or a portion of a revocable living trust is converted to a charitable lead trust (CLT) following the death of the grantor, the charitable interest will precede (or lead) the non-charitable interest. The trustee will be required to pay an annuity (charitable lead annuity trust) or a variable amount (charitable lead unitrust) to a charity each year for a certain number of years. After this interval, the trustee will then distribute the trust property to the non-charitable (usually family) beneficiaries.

The present value of the charitable lead interest at the time the RLT is converted into a CLT will be deductible for estate tax purposes.

Charitable Remainder Trusts

If all or a portion of a revocable living trust is converted into a charitable remainder trust (CRT) following the death of the grantor, the charitable interest will follow the non-charitable interest. The trustee will pay a fixed amount (charitable remainder annuity trust) or a variable amount (charitable remainder unitrust) to a non-charitable (usually family) beneficiary for life or for a certain number of years. When these non-charitable interests terminate, the residue will be paid to a charity.

The present value of the charitable remainder interest at the time the RLT is converted to a CRT will be deductible for estate tax purposes.

A Private Charitable Bequest

A grantor may also transfer property to a revocable living trust that will be distributed to charity following the grantor's death. During the grantor's life, the grantor will have absolute control over the assets of the trust. The trust itself may be altered, amended, or revoked at the grantor's discretion, and property may be added to or taken from the trust as the grantor directs.

At the grantor's death, the trust property will be paid by the trustee to the charity or charities as specified in writing by the grantor. Neither the terms of the trust, nor the size of its gifts and the identities of recipient charities, will become matters of public record, unlike bequests made under a will.

The value of the trust property transferred to charity will be deductible for estate tax purposes.

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