Wealth Management

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CLTs: The Leading Charitable Trust Option for Philanthropists
CLTs: The Leading Charitable Trust Option for Philanthropists 1600 941 smolinlupinco

If you are interested in donating assets to a charity you support but don’t want to permanently give up this property, consider a charitable lead trust (CLT). This trust functions as an alternative to charitable remainder trusts (CRTs). 

CLTs revert your donated assets to your family instead of the charity after a specified amount of time has passed. However, your chosen charitable organization will enjoy a steady source of revenue for the period you gave them temporary ownership. 

How CLTs work

Although a CLT trust is irrevocable, you can continue to fund it throughout your lifetime or create a testamentary trust in your estate plan or will. This is an ideal approach to incorporating your philanthropic goals into your estate plan. 

The basic idea of how a CLT works can get complicated, but typically you would contribute assets to a trust for a specified term. The charity you designate as the beneficiary would receive payouts from the trust during this period. You can also select multiple charities as beneficiaries if you wish and what portion of earnings they should receive. 

How these payments get made depends on your CLT’s structure. Usually, these are made as a percentage of the trust or as fixed annuity payments. 

Tax implications for charitable deductions 

One of the primary motivators for creating a CRT is the tax deduction you receive for the remaining interest value. However, this deduction may be limited, or you might not receive one, depending on whether your CLT is a grantor or non-grantor trust type.  

Grantor CLTs allow you to deduct the current value of any future payments to your chosen charity, though this is subject to imposed deduction limits. The downside to this situation is that the investment income the trust generates is taxable for that term and is the grantor’s responsibility to pay. 

However, if you use a non-grantor CLT, the trust is now the owner of the assets and liable for any taxes owed on undistributed income. This allows your trust to claim the deductions for charitable contributions that are distributed to charitable organizations. Despite the uniqueness of each trust situation, it’s not uncommon for grantor tax liabilities to take precedence over current tax deduction benefits. 

Still, CLTs that are structured correctly create gift or estate deductions based on the portion designated for the charity involved. This is how the transference of remaining interest to family members is possible at a lower tax rate. 

Additional responsibilities for CLTs 

Every year until the term expires or during the life of your beneficiaries, your CLT must make at least one payment to one of your chosen charities. There is no mandatory 20-year timeframe imposed (as is the case with CRTs), and the trust doesn’t need to set a minimum or maximum requirement every year either. Once a CLT’s term expires, the heirs you originally named will have the remainder passed to them. 

© 2022

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Using IRA Charitable Donations as an Alternative to Required Taxable Distributions
Using IRA Charitable Donations as an Alternative to Required Taxable Distributions 1600 941 smolinlupinco

If you’re a philanthropist that receives traditional IRA distributions, there’s a charitable tax advantage you should know about involving cash donations to a charity approved by the IRS. 

What are qualified charitable distributions?

The most relied upon method of transferring your IRA assets to your preferred charity is through an age-restricted tax provision. If you’re an IRA owner over the age of 70 and a half, you can send up to $100,000 annually of your distributions to your qualifying charitable organization. Qualified charitable distributions (QCDs) still count toward your required minimum distribution (RMD) amount but won’t trigger taxes or raise your adjusted gross income (AGI). 

Since your donation doesn’t increase your AGI, it will allow you to: 

  1. Qualify you for additional tax breaks such as threshold reductions for medical expenses, which have a cap of 7.5% of your AGI. 
  2. Circumvent Social Security’s 3.5% investment income tax taxation triggered by your investment income.
  3. Potentially avoid Medicare Part B and D high-income surcharges on your premiums when your AGI exceeds certain levels.
  4. Prevent the charity receiving your QCD from needing to pay federal estate taxes and avoid state death tax liability in most cases. 

Key considerations

You can’t claim deductions for any  QCD that isn’t included in your income. Also, remember that at 72 years of age, you must start taking your RMDs, although you can make QCDs starting at age 70 and a half. 

In 2022, you have to set up direct charitable payments to your qualified charity by December 31st to benefit from a QCD. You’re also allowed to use these QCDs to meet the RMD requirements for your IRA. For example, if you must take $15,000 in RMDs for 2022 and pay a QCD of $10,000, you would need to withdraw $5,000 to fulfill the remaining distribution requirement for this year. 

Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.

© 2022

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Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion
Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion 1600 941 smolinlupinco

For 2022, the unified gift and estate tax exemption is set at $12.06 million, adjusted for inflation, up from $11.7 million for 2021. For many families, this means estate tax liability won’t be a concern. However, others may still benefit from using the annual gift tax exclusion as an estate planning strategy, especially since future tax law changes may lower the gift and estate tax exemption. 

For this reason, a Crummey trust can still serve as an important part of your estate planning strategy.

Limitations on the annual gift tax exclusion

For 2022, the annual gift tax exclusion allows you to give gifts valued up to $16,000 per recipient without incurring any gift tax. This $16,000 amount is indexed for inflation, but only in $1,000 increments.

For instance, this means that if you have four adult children and six grandchildren, you can gift each of them $16,000 this year (for a total of $160,000) without paying any gift tax. Since this exclusion is per donor, the amount is doubled for married couples.

However, when giving outright gifts, there is always the risk that the money or property could be wasted, especially if you’re giving to a recipient who may be young or irresponsible. 

As an alternative, you can transfer assets to a trust that names your child (or another recipient) as a beneficiary. This setup allows your designated trustee to manage the assets until the recipient reaches a specified age.

But this strategy comes with a catch, because gifts must be a transfer of a “present interest” to qualify for the annual exclusion. In this context, a “present interest” means the recipient has an unrestricted right to the immediate use, possession, or enjoyment of the income or property included in the gift. 

Because of this, a gift made to a trust won’t qualify as a gift of a present interest unless certain provisions are made in the trust language. Instead, it will be considered a gift of a “future interest” and won’t be eligible for the annual gift tax exclusion.

How a Crummey trust can help

A Crummey trust can offer a solution here. Crummey trusts satisfy the rules for gifts of a present interest but don’t require the trustee to distribute the assets to the beneficiary.

In a Crummey trust, periodic contributions of assets can be coordinated with an immediate power that gives the beneficiary the right to withdraw the contribution for a limited time. The expectation of the donor, however, is that the power won’t be exercised. (This cannot be expressly provided for in the trust document.)

These gifts will not be treated as a gift of a present interest due to the beneficiary’s limited withdrawal right, allowing gifts to the trust to qualify for the annual gift tax exclusion. Note that the tax outcome is determined by the existence of the legal power and not the exercise of it.

Additional requirements

To ensure your Crummey trust will hold up under IRS scrutiny, you must give the beneficiary actual notice of the withdrawal right, as well as a reasonable period (typically at least 30 days) to exercise it. 

If you have further questions regarding the use of a Crummey trust, contact us.

© 2022

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Subsequent Events and Financial Reporting
Subsequent Events and Financial Reporting 1600 941 smolinlupinco

In financial reporting, “subsequent events” are major events or transactions that occur after the reporting period ends but before financial statements are finalized. These events may include cyberattacks, natural disasters, regulatory changes, and the loss of a large business contract.

Whether or not you should report these subsequent events is something of a gray area, but the following guidance from the AICPA can help you make your decision.

Recognized and unrecognized subsequent events

Financial statements are a reflection of a company’s financial position at a specific date, as well as the operating results and cash flows for the period ending on that date. 

Since completing financial statements takes time, there’s often a gap between the financial statement date and the date when financial statements are ready to be issued. In some cases, unforeseeable events may occur during this time frame.

The AICPA classifies subsequent events into two groups in chapter 27 of their Financial Reporting Framework for Small- and Medium-Sized Entities:

1. Recognized subsequent events

These subsequent events offer further evidence of conditions that already existed on the financial statement date. For example, a major customer may declare bankruptcy due to the risk associated with its accounts receivable. In this case, there are often indicators of financial distress—such as rising staff turnover or late payments—for some time before the customer finally files for bankruptcy.

2. Nonrecognized subsequent events

Nonrecognized subsequent events are due to conditions that arose after the financial statement date. For example, if a business is severely damaged by an earthquake or a major storm, they’ll usually have no way of forseeing this disaster before it occurs.

Generally speaking, recognized subsequent events must be recorded in your company’s financial statements. Nonrecognized subsequent events don’t need to be recorded, but you may need to disclose the details of the event in the footnotes.

Understanding disclosure requirements

As a general rule, you should disclose nonrecognized subsequent events in the footnotes if omitting information about them might mislead investors, lenders, or other stakeholders. At a minimum, your disclosures should describe the event and provide an estimate of its financial impact, if possible.

In certain extreme cases, a subsequent event may have an effect pervasive enough that it puts your company’s viability in question. If so, your CPA may choose to re-evaluate the going concern assumption underlying your financial statements.

We can help you make disclosure decisions

If you’re unsure whether you need to report or disclose a subsequent event, contact us. We can offer you guidance and help you eliminate the guesswork.

© 2022

Defined-Value Gifts Avoid Gift Taxes

How to Use Defined-Value Gifts to Avoid Unexpected Gift Taxes
How to Use Defined-Value Gifts to Avoid Unexpected Gift Taxes 850 500 smolinlupinco

For 2022, U.S. taxpayers may transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes, thanks to the highest gift and estate tax exemption in history. 

However, this historically high exemption may not last forever. Unless Congress chooses to pass further legislation, the exemption amount is currently scheduled to drop to $5 million, adjusted for inflation, in 2026. 

If you’re like many taxpayers, you may be thinking about making a substantial gift to take advantage of the current exemption before it expires. However, many commonly gifted assets like family limited partnerships (FLPs) and closely held businesses can be risky because they are difficult to value. 

To avoid unexpected tax liabilities, you may want to consider a defined-value gift.

Defined-value gifts

To put it simply, a defined-value gift consists of assets that are valued at a specific dollar amount (as opposed to a specified percentage of a business entity, FLP units, or a certain number of stock shares).

Properly structured defined-value gifts are useful because they don’t run the risk of triggering an assessment of gift taxes. In order to properly implement this strategy, the defined-value language in the transfer document must be drafted as a “formula” clause and not as a “savings” clause.

While a savings clause provides for a portion of the gift to be returned to the donor if it is ultimately found to be taxable, a formula clause will transfer a fixed dollar amount that is subject to adjustment in the number of units or shares necessary to equal that dollar amount. This adjustment will be based on the final value determined for those units or shares for federal gift and estate tax purposes.

Using the right language

It’s vitally important to use certain specific, precise language in the transfer documents for defined-value gifts. Otherwise, the gift may be rejected as a defined-value gift by the U.S. Tax Court. 

Take, for example, a recent court case involving an intended defined-value gift of FLP interests. In this case, the Tax court decided to uphold the IRS’s assessment of gift taxes based on percentage interests, despite the donor’s intent to structure the gift as defined-value. 

The Court’s reasoning? The transfer documents had called for the FLP interests to be transferred with a defined fair market value “as determined by a qualified appraiser.” However, the documents made no provision to adjust the number of FLP units if their value was “finally determined for federal gift tax purposes to exceed the amount described.” 

As a result, the court ruled that a defined-value gift had not been achieved.

We can help you make a defined-value gift

As you can see, an effective defined-value gift requires carefully and precisely worded transfer documents. If you plan to make a substantial gift of hard-to-value assets, contact us for assistance. We can work with you to help you avoid unexpected tax consequences from your gift.

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