What are the Pitfalls of a Charitable Remainder Trust?

If you have discretionary funds and are philanthropically minded, a charitable trust can serve you well, giving money to an organization you want to support, while passing assets to beneficiaries without burdening them with estate or gift taxes, but is it right for you? Some of the answers can be found in a recent article from U.S. News & World Report titled “Should you Set Up A Charitable Trust?”

Some basics to consider about charitable trusts are:

  • There are a number of different types.
  • Consider all disadvantages and alternatives.
  • Make sure it works with your estate plan and your long-term financial plan.

The most common types of charitable trusts are the Charitable Remainder Trust (CRT) and the Charitable Lead Trust. For the CRT, funding begins with cash or other assets, like stocks. The trust pays an income stream to family members or beneficiaries while they are living or for a set period of time. When they die, or when the time period ends, the remaining assets in the trust go directly to the charity.

For a Charitable Lead Trust (CLT), payments first go to the charity and then the remainder transfers to the beneficiary at the end of the trust term. One of the benefits of the CLT is to reduce the beneficiary’s tax liability, while giving the estate a charitable deduction.

An estate planning attorney will help refine these choices to the ones best suited for each individual. The CLT and CRT let you support a cause you believe in, while alleviating the tax burden to loved ones.

Charitable trusts are also useful when wishing to sell an asset. If an asset with a large capital gain is to be sold, like real estate, individual stock or a business, the asset may be moved into the charitable trust. The trust becomes the owner of the asset, and then the asset can be sold, avoiding the capital gain. Speak with your estate planning attorney to ensure that this is done correctly.

What about the disadvantages? There are fees to establish and maintain a trust. Charitable trusts are usually irrevocable, so if your financial situation changes, you may not be able to gain access to the funds. There may also be some pushback from heirs or family members who would rather see your money being given directly to them and not a charity.

Make sure that the benefits you and your heirs seek to gain from establishing a charitable trust, whichever type you use, outweigh the management costs. Do not create a trust with money you may need in the future. Charitable trusts are feasible only if you have already paid off all debts and are confident you will not need any of the assets in the future.

The exact amount to put in the trust should be carefully considered, with an eye to future expenses and your overall financial status. Your estate planning attorney may wish to meet with you and senior officers from the charity to ensure a clear understanding of your wishes and make sure that this is the best solution for all.

Reference: U.S. News & World Report (Feb. 23, 2022) “Should you Set Up A Charitable Trust?”

Protect the Family Farm with Advance Planning

Have you figured out who will take over the family farm? Are you or your parents prepared to transition the farm or ranch to the next generation? How will family members be part of the transitions? Do you have a plan to minimize tax exposure?

These are just a few of the questions that must be addressed about the future of the family farm or ranch, reports the article “Don’t be a failed family-business statistic: Plan for your farm’s future” from High Plains Drifter. It’s one of the hardest parts of the agriculture business. Decades of hard work and assets are at stake, and the statistics are not great. Only 30% of any kind of family businesses survive to the second generation.

You need a long-term strategy and planning that needs to be started long before any member of the family begins thinking about retirement. You’ll also need good advisors, including an estate planning attorney, accountant and possibly a banker.

What is a succession plan? A succession plan is a forward-looking strategy that prepares the individual and their family for the change in ownership, including development of leadership to avoid family disputes, manage tax consequences and ensure that the farm or ranch smoothly transitions to the next generation of owners.

The estate plan provides the mechanics to implement the succession plan. It can be complicated, so an experienced estate planning attorney who has worked with farm or ranch owners will be invaluable.

Here are three key areas where guidance is critical:

On-farm and off-farm heirs. How do you balance the inheritance of children who remain on the farm and those who chose to pursue other occupations? An objective viewpoint is needed, and a calm head. There are different ownership structures that can be used to define the roles and expectations for both on-farm and off- farm heirs.

Smooth financial transition. It is important to lessen tax liability and maximize benefits. Cash will be needed to pay estate taxes. This is where many family businesses are lost: a key asset must be sold to pay the tax bill, and it dampens the chances of success for the future.

Address financial needs of current and future generations. Can the business support multiple generations? What does everyone need to continue living on the farm, and how will the income be generated?

Family farms and ranches that survive to the second or third generations don’t happen by accident. Succession plans need to be created and then they need to be reviewed every few years. If you have a will or an estate plan, if you haven’t updated it in five years, it’s time to review it or create one.

Reference: High Plains Journal (Nov. 8, 2019) “Don’t be a failed family-business statistic: Plan for your farm’s future”