San Jose Charitable Remainder Trusts Attorney

San Jose Charitable Remainder Trusts Lawyer

Giving to Charity and Reducing Your Tax Burden

A charitable remainder trust can be an effective means to responsibly invest money while still alive and make a transformative difference through posthumous philanthropy. This valuable form of estate planning allows your charitable-giving goals to be established well in advance of your passing while also creating tax benefits for you and the heirs of your estate.

Setting up a charitable remainder trust isn’t a simple task for a layperson to navigate. Knowledge of federal and California tax laws is important for completing all the appropriate paperwork and record-keeping required. A San Jose elder law lawyer with experience in charitable remainder trusts can help work through the process with you to maximize the financial benefits for yourself and the beneficiaries of the funds.

How Do Charitable Remainder Trusts Work?

There are multiple forms of charitable trusts. A charitable remainder trust allows for distributions to one or more beneficiaries for life or a pre-set term of up to 20 years. You can be a beneficiary of your trust while still alive, creating a form of revenue with tax benefits that can be especially important for reliable income during retirement years. The trust generates an irrevocable remainder interest which federal treasury regulations dictate must be paid to charity when the trust ceases paying the beneficiary. Variations of the charitable remainder trust include annuity trusts and multiple forms of unitrusts:

• Charitable remainder fixed annuity trusts pay the beneficiaries a fixed annuity each year. Even if the trust performs poorly, the amount paid out is the same. The annuity method requires careful planning, as the annuity can’t be changed once the trust is established, regardless of how it is performing. Large annuities run the risk of diminishing income tax deductions and decreasing the principal balance, which means less is left over to donate to charity.
• Charitable remainder unitrusts disperse a percentage of the trust’s assets every year. The trust’s value is reappraised each year. Per IRS requirements, at least five percent of the value of the trust must be disbursed each year. Unlike with the annuity method, the amount of income a beneficiary derives from the trust each year is altered by the trust’s performance.

Regardless of what type of trust is formed, once properly established it becomes a legal entity, separate from the person who established it. The property and assets held by the trust are no longer the property of the grantor.

The Benefits of Establishing Charitable Trusts

The primary tax benefit of the charitable remainder trust is the ability to protect assets from capital gains taxes. An asset that appreciates over the years and is then sold can be taxed as a capital gain for the difference between its current value and the value it was originally purchased for. If placed in a trust, that asset is protected from capital gains taxation, a fixed withdrawal can be made annually from the trust, and the remainder can be passed on to charity when the trust’s founder passes away.

As an example of how the capital gains tax works, consider the owner of a piece of commercial real estate. The real estate was purchased 30 years ago for $500,000, but the value has increased 10-fold over three decades. Selling the property for $5 million would result in a capital gains tax levied against the $4,500,000 of profit.

If the owner of the real estate in the example instead places the property in a charitable remainder trust, the $5 million value will never be exposed to capital gains tax. Instead, the owner can designate himself as a trustee and beneficiary, drawing up to five percent of the value annually for the rest of their life or a set period of up to 20 years.

When the owner of the real estate in the trust dies, the trust goes to the charitable beneficiary established at the time of the trust’s establishment. The trust becomes a donation from the estate to the charity, continuing to fortify the value from taxation.

The trust acts as protection for the value of an asset. Charitable giving is a tax-exempt gift, so by keeping assets in the trust, the capital gains taxes are negated while you are alive and your estate won’t pay taxes on the remaining value that is donated to charity when it is time to dissolve the trust.

The trust also creates the opportunity for income tax deductions based on the amount dedicated to charitable donations.

There are more than just financial reasons to form a trust. Typically, the remainder donated to charity is benefiting a cause the grantor cared about and supported during their life. It’s rewarding for many to know the cause will receive a substantial boost of support after their passing.

A trust is an opportunity to establish a legacy that will outlive you. You may even view it as a guide for the future generations of your own family or in your community at large to support a worthy cause.

The Complexity of Opening a Charitable Remainder Trust

Anyone can set up a charitable trust in California, provided they have the charitable intentions to do so and the assets on hand they wish to leave to charity. Just because anyone can become the grantee of a charitable trust doesn’t mean they have the expertise to handle the legal setup. The process is time-intensive and also expensive, requiring extensive knowledge in estate planning. Retaining the services of a San Jose charitable remainder trusts attorney with the expertise to simplify the process can quite literally pay off in the long run.

Each year, Form 541-B, which is the Charitable Remainder and Pooled Income Trusts, is used to report the financial activity associated with charitable trusts. The form is used to detail the deductions and distribution of the trust, record information about donor and asset contributions, and note the accumulated income that would convey to charity after the grantee’s life. Form 541-B should not be filed if the trust has no California fiduciaries, noncontingent beneficiaries, or income sourced from California.

California income taxes do not apply to charitable remainder annuity trusts or charitable remainder unitrusts unless there is unrelated business taxable income. In addition to an attorney, professional financial advice and tax accounting services are recommended when dealing with trust filings.

All of the details of the trust must be managed exquisitely, as the liability of the trustee is sizable when mistakes occur. The more beneficiaries there are to a trust, the more complicated the proper management becomes. The liability of the trustee can be up to 200% of the trust’s value, creating a nightmare scenario if proper documentation and procedures weren’t put in place from the start.

If you are the trustee and come under legal attack or are a beneficiary who believes a trustee has wronged you, an attorney with trust and estate litigation experience should be your first call. After the death of a trust’s originator, heirs and beneficiaries have only four months to contest the validity from the time they are notified of the death.

The Charitable Lead Trust

Another option besides a remainder trust is a charitable lead trust. This works in reverse, with a set amount of income designated for charity from the outset. The remaining amount is paid out to the beneficiaries of the grantor or stays in the trust.

If the number one goal for establishing the trust is supporting a charitable organization, this option provides a more stable way to do so. This form of trust is less effective for generating a revenue stream for the trustee or other beneficiaries.

The Trust as an Entity in Estate Conflicts

The administration of a charitable trust, especially after the original grantor dies, is a separate set of complexities. An important circumstance to remember is the charitable trust is an entity with laws and regulations to abide by.

This can come into play when a will stipulates the dispersal of assets that have been put into a trust. This most commonly happens when a will is written but not updated over the years. Consider the hypothetical commercial property owner from the example earlier. If the property was added to a will soon after it was purchased and the owner neglects to update the will when the property is instead placed in a trust, a potential conflict could arise after the owner’s death.

When the terms of a person’s will and the terms of a trust conflict, the law typically prevails in favor of the trust. It is the legal holder of the asset and is not bound by what is in the will. A trusted professional estate attorney can catch and correct these possible conflicts while writing wills and establishing trusts, saving both legal fees and headaches for the estate and its heirs in the future.