Charitable Trusts: Leaving a Legacy

Charitable Trusts can be a flexible and efficient piece of a philanthropically inclined individual’s financial plan. Charitable Remainder Trusts have historically been used to create a retirement income stream along with a tax deduction during peak earning years, while Charitable Lead Trusts have been utilized to transfer appreciated assets to beneficiaries in a tax-efficient way. Each of these trusts provides a gift to a qualified charity, leaving a legacy for the donor. The variety of options for asset funding and trust structure offer the opportunity to customize plans in a way that maximizes both the tax and the emotional benefits.

Here are a few examples of opportunities to use these versatile tools:

Case Study #1

A client held a large amount of stock in a single company she had received as part of her employment compensation. As a result, her overall portfolio had considerable concentration risk, but selling the stock to rebalance would result in significant capital gains. She was still ten years from her projected retirement date and had sufficient liquidity in other assets.

Charitable Trust Solution #1

The trust was established as a Flip-CRUT (Charitable Remainder Unitrust) to pay net income or 5% of the market value annually, whichever is less, for ten years, at which point it would convert to a standard 5% unitrust. Provisions in the trust allowed as many expenses to be paid from income as possible. The trust was funded with the appreciated stock in-kind, and within the trust it was liquidated without capital gains. The trust was then invested in a diversified portfolio designed to minimize income, including zero-coupon bonds and mutual funds.

The client had piece of mind mitigating the concentration risk. Income was minimized during the pre-flip period allowing the trust to appreciate and grow to provide greater income during the post-flip period. The client enjoyed the flexibility of adding assets to the trust later, and she enjoyed considerable tax benefits throughout the life of the trust. Finally, she will be able to leave a legacy gift with her favorite charity.

Case Study #2

An aging client had owned a duplex for years and was tiring of the hassles of managing the property. In talking to him, we learned he had been using the income to provide supplemental support to his adult daughter, and it had appreciated significantly. He intended to provide this support to her for the remainder of her life through lifetime gifts and then through his estate.

Charitable Trust Solution #2

We talked about funding a Flip-CRUT, but he elected to establish a CRUT with a 5% payout that would pay to his daughter for her lifetime. He funded the trust with the duplex along with some appreciated stock that could be liquidated for expenses and payments before the duplex sold. The duplex was sold by the trust and invested in a diversified portfolio to meet the long-term objective of supporting his daughter.

The financial benefits to the client were largely of a tax nature and went as planned, but the emotional benefits far exceeded everyone’s expectations. The client was hugely relieved to be done managing the property, and for having to account annually for the support of his daughter through a gift tax return. The surprise benefit was the improvement in the relationship with his daughter. By fixing the payment as a unitrust, and by inserting a corporate trustee as the payer the heated financial conversations that had once dominated their interactions were a thing of the past. The client and his daughter were also very relieved she could receive uninterrupted support through any period of incapacity on his part or during the settlement of his estate. And after providing for the needs of his daughter for her lifetime, the Trust will benefit a local non-profit organization.

Case Study #3

A client had a large amount of assets in IRA’s. He had previously listed his son as a payable on death beneficiary and told his son it was his desire for him to stretch the payments by taking required minimum distributions to minimize taxes.

With the passage of the SECURE Act, his son does not qualify as an eligible qualified beneficiary, so the Stretch IRA is no longer an option. Our client was concerned about the increased taxes his son would pay by accelerating distributions and was also concerned his son would spend the funds too quickly.

Charitable Trust Solution #3

The estate plan has now been updated and includes the creation of a standard unitrust with a 5% payout. Funding for this trust will come from the IRA. The client is relieved by the tax mitigation strategy. He is also very happy he doesn’t have to trust his son to spread the spending, and he loved that he could designate his favorite charities to receive what remains after his son’s life creating a legacy of support.

The Trust Services team at Oregon Pacific Bank has the skill and experience necessary to administer Charitable Trusts and we are available to serve as trustee. In addition, our trust officers love to hear about unique situations and brainstorm possible solutions; we are happy to run calculations and compare options to serve your clients’ financial and emotional needs. We also have templates of charitable trust documents to share upon request. Please contact your local trust officer for more information.