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Using a Trust to Provide for Your Family and Charity

Estate planning and tax planning often go hand in hand. There are many estate planning devices which allow you to (legally) obtain tax benefits. One example is a charitable remainder trust, which is a special type of estate planning trust that can provide an immediate tax benefit for you while guaranteeing future income for your family and, ultimately, a favorite charity.

The Basics of a Charitable Remainder Trust

In any trust you transfer assets to a trustee. Most estate planning trusts are revocable, meaning you can amend or even revoke the trust outright at any point during your lifetime. But some estate planning trusts must be irrevocable—that is, you must surrender all control over the assets to the trustee—in order to receive certain tax benefits. A charitable remainder trust is such an irrevocable trust.

The basic idea behind a charitable remainder trust is that after you transfer your assets to the trustee, you or another designated beneficiary will then receive part of the trust’s principal each year as income. Upon the beneficiary’s death, whatever is left over in the trust—the “remainder”—must be paid over to a tax-exempt charitable organization. In effect, a charitable remainder trust is a delayed gift to charity, one which provides the donor with an immediate tax deduction while still allowing them (or their family) to benefit from the income produced by the donated assets.

Courts Still Sorting out 1967 Charitable Remainder Trust

Keep in mind, a charitable remainder trust is a complex undertaking which can take decades to fully administer depending on how it is structured. Consider a recent decision by a California appeals court involving a charitable remainder trust funded nearly 50 years ago. The donor in this case used her sizable estate to fund a charitable remainder trust with her nieces and nephews as income beneficiaries.

The trust took effect with the donor’s death in 1967. Subsequently, each niece or nephew received $25,000 per year from the trust. Upon each of their deaths, their respective heirs continue to receive this income distribution, up to the point where all descendants living at the time of the original donor’s death have themselves passed away. There are currently three groups of descendants still receiving distributions. Several charities were named as the remainder beneficiaries.

Over the years, there have been at least half a dozen lawsuits related to the administration of the trust. The most recent case involved a claim by the charitable remainder beneficiaries against the trustee (a bank) over the size of their distributions. Several years earlier, the charities and the donor’s relatives reached an agreement allowing most of the trust’s principal—which was in excess of $70 million—to be distributed without having to wait for the last relatives to die. But even after that settlement was reached, the trustee had to wait for an IRS ruling on certain tax issues. By the time that was dealt with, the value of the trust’s assets had declined by about $11 million due to the downturn in the securities markets. The charities accused the trustee of waiting too long to distribute the remainder assets, but in a January 2016 decision, the California Court of Appeals for the Second District held it “could not rule as a matter of law that [the trustee] committed a per se fiduciary duty breach.”

Get Help from an Estate Planning Attorney

While you may not be looking to set up your relatives for the next 50 years with a guaranteed income, a charitable remainder trust might still be a useful part of your tax and estate planning. A qualified San Diego estate planning attorney can advise you on the best type of trust for your situation. Contact the Law Office of Scott C. Soady if you would like to speak with someone as soon as possible.

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