A Charitable Remainder Trust Can Be a Highly Effective Tool in Minimizing Burdensome Capital Gains Taxes While Still Providing Income for Beneficiaries
Many people are concerned with tax implications when they begin to plan their estates. Most people would agree that their ultimate goal in planning their estate is to provide for their loved ones in the most efficient and economic manner. This generally includes alleviating the often-burdensome taxes that can be imposed on estates. For those with highly appreciated assets, the tax burden can be quite high when assets are not properly provided for in an estate plan. A Charitable Remainder Trust (“CRT”) is one device can that alleviate these burdensome taxes and produce the best overall return on an asset where the settlor (person creating the trust), beneficiaries and a charity win in the end.
A CRT is appropriate in limited circumstances where assets are highly valued and subject to a capital gains tax if sold.
A CRT, while not appropriate in every circumstance, can provide significant tax benefits when a highly valued and appreciated asset is subject to a capital gains tax if sold. A CRT may also be appropriate when a person’s income is relatively low in comparison to their valued assets. We can help you prevent a high capital gains or estate tax on these assets, by employing a CRT.
A CRT is a tax-exempt irrevocable trust carefully designed to reduce taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time (generally, during the life of the trust settlor) and then, when the stated period of time lapses (this usually occurs at the death of the settlor), donating the remainder of the trust to an IRS-approved designated charity. When the charity sells the asset after it obtains ownership, no capital gains tax is imposed. The IRS allows for a large deduction during the year the asset is donated to charity. This deduction allows for savings in taxes that can be used to buy an insurance policy on the life of the settlor in what is known as “wealth replacement.” A CRT can thus provide income to named beneficiaries, provide for a charitable donation and the settlor can make a sizable return on his appreciated asset(s).
While a CRT does provide many incentives to those with sizable assets, it does have some pitfalls. A CRT may not provide a worthwhile return on an asset if the asset is not large enough in value. Generally, the asset’s value must outweigh the tax burden imposed on the estate if the asset was to be passed to a beneficiary rather than a charity. A CRT is also irrevocable. This means that assets poured into the CRT will be permanently and irrevocably committed to the trust. Because of the permanent nature of a CRT, it is important to discuss all benefits and disadvantages of a CRT with an experienced attorney before committing any assets to a CRT. The attorneys at Alavi & Broyles are experienced in advising clients as to whether a CRT is right for them and assisting them in the creation of a trust that is most beneficial for their estate planning needs.
It is difficult to contemplate the scenario of what would happen to your children if you and your spouse died while your children are still minors. Of course, all parents would want what is best for their children including having someone trusted and selfless assume Guardianship over the children. However, what if a Guardianship contest broke out among family members over who received Guardianship because the parents failed to designate a Guardian? And what if this contest was based on financial gain, because with Guardianship of the children, comes the money associated with the children? Most parents would say that that is the opposite of what they would want should they pass before their children reach the age of maturity. The failure to designate a Guardian of minor children could result in such a contest.
The promise of an inheritance, life insurance pay out or litigation settlement can entice family members to pursue Guardianship over orphaned minor children thus leading to drawn-out legal battles among family members for Guardianship rights.
When most couples have a baby, the last thing they may think about is a potential Guardianship fight. Couples with minor children may have the belief that it’s too early to start planning for a time when they may not be around anymore. Couples may also have the belief that if something were to happen to them, their children would be taken care of by family members who love their children just as they do, so it is unnecessary to put anything in writing. However, the reality is that Guardianship contests break out among families more often than one would think.
Oftentimes life insurance benefits or litigation settlements due to children of deceased parents are conditioned upon a Guardianship determination. Also, a child’s inheritance is directly related to a Guardianship determination because the Guardian will likely be in control of the minor child’s inheritance in order to provide for the child’s health, education, maintenance and support. If a Guardian is not designated, under California law a court must designate a Guardian to take care of any minor children. When the promise of a sizeable inheritance or life insurance pay out to the children is dangled in front of a proposed Guardian, assuming a Guardianship role over a child is much more appealing and can lead to self-interest. This can lead to drawn-out legal battles to establish Guardianship rights before a court of law.
Younger and older parents should plan, as early as possible, for the possibility that they could leave behind minor children.
Possible Guardianship contests highlight the importance of planning for the untimely scenario that a couple may leave behind minor children. Whether the couple is younger or older, it is essential for them to select a trusted family member or loved one to assume the role as a Guardian for any children left behind if both parents die before the children reach 18. This should be done as early as possible in the children’s’ life and should involve a conversation with the designated Guardian in order to ensure that the Guardian will assume the role and understands the importance of such designation. This designation virtually eliminates the possibility of Guardianship contests based on financial gain and should put parents at ease knowing that someone trusted would provide for their children.
The attorneys at Alavi & Broyles understand that choosing a Guardian for minor children is an important decision. The decision should be well thought out and properly memorialized as to reduce the possibility for contests down the line. The attorneys can assists clients plan for potential Guardianship and put parents’ minds at ease knowing that their children will be taken care of, no matter the circumstances.
Most people understand that it is important to draft and execute a trust or some type of estate planning instrument. However, some are not sure about the how to go about selecting the right Trustee to manage trust assets. Unlike an executor of a will, a Trustee’s duties to the trust can run for many generations rather than simply ending when the estate is closed. Choosing the wrong person as Trustee can result in a mismanaged trust where assets are squandered and the creator’s intent is not carried out. The right person will ensure that the trust is properly managed in accordance with the wishes of the trust creator.
Duties of Trustee
Primary responsibilities of a Trustee include: collecting trust assets and property, investing the trust assets and money, paying bills and taxes of the trust, navigating and filing annual or quarterly accountings and managing money for the trust beneficiaries. The Trustee is also responsible for regular communication among the beneficiaries in order to issue checks and authorize withdrawals against the principal.
Powers granted to the Trustee are limited to the terms of the trust. This means that it is essential for the creator of the trust to describe the type of powers he or she wants the Trustee to have. These powers can be limited or broad depending on the nature and purpose of the trust. However, it is generally a good idea to give the Trustee some latitude when it comes to investment options because of the unstable and ever-changing nature of the economy.
Choosing a family member as a Trustee versus a professional Trustee
Choosing the right person, or people, to be the Trustee of your trust can be a daunting task. Most people tend to choose a family member or loved one as a Trustee because the option is safe and comfortable. While there are no formal requirements a Trustee must meet to be designated, a Trustee should be competent and possess at least some basic financial knowledge. This family Trustee option is popular because family members generally do not require compensation and can be expected to act in the years to come. However, family conflicts and a lack of financial expertise can hinder the designated Trustee’s ability to carry out the trust as specified. While a professional Trustee, such as a bank or trust company, will charge a management fee and can tend to be impersonal in nature, this option eliminates any family conflict issue and can be beneficial to the overall trust because of financial and investment expertise.
The designated Trustee should also be someone with whom the beneficiaries are comfortable because the Trustee will ultimately be responsible for the disbursement of trust assets to the beneficiaries. It is also a prudent decision to choose a successor Trustee. Multiple successors can be chosen based upon preference and circumstances. Because no one Trustee can live forever, a bank or trust company should be designated as the final successor Trustee in order to ensure a smooth transition into the years ahead.
Finally, a trust protector can be designated in the trust to allow the relatively simple path to the removal and replacement of an ineffectual or unworthy trustee
The attorneys at Alavi & Broyles understand that choosing a Trustee is an important decision that individuals should decide for themself. Alavi & Broyles has expertise in helping those planning their estates choose the best Trustee for their trusts.
Max Alavi focuses on assisting clients establish effective and secure vehicles for passing their assets to their loved ones and protecting their families from the uncertainty and expense associated with probate and testamentary guardianship matters. He is also dedicates a significant portion of his practice to complex probate matters, trust administration and litigation of contested trusts.
Max Alavi, Attorney at Law, APC has 6 locations in Orange County and Los Angeles County, California