A CLT works like a GRAT in that it’s also irrevocable and carries the same risks as well as setup and administration costs, but instead of paying an annuity to yourself, you’re paying it to a charity. At the end of the trust’s term, any remaining assets pass to your chosen noncharitable beneficiary, which can be yourself—if established as a grantor trust—or your heirs.
CLTs are slightly more complicated than GRATs due to their tax considerations and deductibility, which varies depending on how you structure the trust:A grantor CLT treats the donor as the owner of the assets for income tax purposes, allowing you as the grantor to take a charitable income tax deduction in the year the trust is funded equal to the present value of the calculated charitable benefit of transferred assets. However, as the grantor, you are also responsible for paying income tax on trust income during the term. Because of this, grantor CLTs are generally better suited to income-tax planning rather than estate-tax planning.With a nongrantor CLT, the trust owns the assets, allowing it to take an unlimited charitable tax deduction equal to its gross income, each year, over its termKolkata Investment. Although you as the grantor do not receive a charitable tax deduction for the transferred assets, you may take a gift or estate tax deduction on the present value of the calculated charitable benefit—and you are not responsible for any income taxes on the trust’s income during the term.
The IRS requires that you use actuarial tables to determine the present value of the charitable annuity for tax purposes (download Table B under “Standard Annuity, Income and Remainder Factors”).
When you use Table B, the law requires that you apply an interest rate equal to the IRS’ Section 7520 rate at the time of the CLT’s creation. The lower the Section 7520 rate, the larger the value of the annuity—and the smaller the value of the remainder interest for gift-tax purposes.
For example, let’s say in January 2022 you created a 10-year, $10 million CLT that distributes a $1 million annual annuity. Using the 7520 rate at that time (1.6%), your value factor for a 10-year term would have been 9.1735. That means your total charitable interest is valued at $9,173,500 ($1 million × 9.1735), whereas the remainder interest—that is, the amount potentially subject to gift taxes—is valued at $826,500.Udabur Stock
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