News & Resources: Blog

The Use of Charitable Trusts to Provide Income to Heirs

Published: December 1, 2022

A charitable trust is a type of irrevocable trust that provides income to your heirs while benefiting both you and the charity. If you are philanthropically minded with nonessential assets like stocks or real estate, a charitable trust can offer many financial advantages for all those involved. Once in place, a charitable trust is irrevocable even if you experience a personal or business financial loss. There are two primary charitable trust types:

Charitable Lead Trust (CLT)

This trust is designed to distribute a portion of its proceeds to charity for which you receive a tax deduction equal to the payments. The remainder of the principal is distributed among your beneficiaries.

Charitable Remainder Trust (CRT)

This trust grants income to a designated individual by distributing non-income-producing assets first placed in the trust. A charitable donations tax deduction applies to the remaining assets earmarked for the charity. The chosen charity receives the remaining assets at the end of the trust’s term or upon your death.

Each trust type comes with many options to consider and strategies for maximizing its benefits. Both trust types do not require you to choose your charity beneficiary. Instead, you create a donor-advised fund that directs payments from either trust type to your chosen charities. This tactic allows flexibility to change your mind about an existing charity or add a new one.

For income-producing purposes to heirs, a charitable remainder trust provides options from the sale of your non-income-producing assets. For example, purchasing a life insurance policy can have premiums paid by the charitable remainder trust while using residual funds to support philanthropic intentions.

Charitable Remainder Trusts are also known as a split-interest trust, making payments from income first to the beneficiary or beneficiaries in a set amount with the remaining income supporting the organization, which is the opposite of a Charitable Lead Trust. Often the grantor is the primary beneficiary, with contingent beneficiaries named after the grantor’s death.

The two ways to receive trust payments in a Charitable Remainder Trust are either a fixed annuity or a percent of trust assets known as a unitrust.

In a Charitable Remainder Annuity Trust, it is not permissible to change the annuity amount once the trust is created, so it is best to over-fund rather than not have enough. An annuity trust provides a fixed dollar amount each year even if the trust’s income is less than anticipated.

A Charitable Remainder Unitrust allows receipt of a fixed percentage of the trust’s assets each year. The trust’s value receives an annual appraisal which determines the dollar amount of the set percentage for distribution. This funding method ties income to the trust’s success, providing more in good years and less in years when assets are underperforming. If trust payments are not a significant source of income to beneficiaries, this can be a good option. The IRS requires a minimum five percent distribution of the trust valuation annually.

Work with an estate attorney to design a charitable trust. They can help you determine which charitable trust type is best for you and what assets to place in the trust. An estate planning attorney will help you identify beneficiaries and payment strategies, as well as the value of your tax deduction. Once you draw up the trust document, the assets will be moved to fund the charitable trust unless you create the trust as part of your will.

The charity you seek to benefit may have preferences about how and when to donate. Speak with the organization before creating an irrevocable charitable trust. This trust type can lessen your income, estate, and capital gains taxes by making 501(c)(3) donations to a charity and providing a steady income to heirs. Creating a charitable trust is a practical, multipronged approach to leaving your legacy, permitting the allocation of money for both a charity and your beneficiaries while realizing specific tax advantages.

If you have questions or would like to discuss your legal matters, please do not hesitate to contact our office at 215-364-1111 to schedule a consultation.

CLIENT Testimonial

It can be quite confusing to determine which Medicare plan is best for you. There are several types of plans, and each has its own advantages and disadvantages. Understanding some basic features will help you decide how to maximize your healthcare dollars and choices. You should review your choice periodically, especially as elements of the Inflation Reduction Act of 2022 change prescription medication and vaccine policies. Coverage can also change from year to year..

There are three basic types of plans:

Original Medicare
Medicare Advantage
Medigap

Original Medicare

Medicare is a government health insurance plan for people 65 and older. Original Medicare, sometimes called traditional Medicare, comes in several parts. Each part covers different things and has various associated costs.

Most people do not pay for Part A as it was deducted from their taxes paid while working. It is primarily for hospital visits and nursing care. However, there are many fees associated with being in a hospital that Medicare does not cover, which you still might have to pay out of pocket.

Part B requires monthly premiums, which can be deducted from your social security. You can elect to enroll in part B through Original Medicare. It covers a portion of doctors' visits, durable medical goods, and more.

Part D covers the cost of many prescription medications. You can add it to Original Medicare or purchase it as part of a Medicare Advantage plan.

Medicare Advantage

Medicare Advantage is offered through private insurance companies that Medicare approves. Most plans include Parts A, B, and D of Original Medicare with some variations from the original. There are a wide variety of Medicare Advantage plans, including Preferred Provider Organizations (PPO) or Health Maintenance Organizations (HMO). PPOs tend to have higher premiums and offer more choices than HMOs. Medicare Advantage HMOs and PPOs often have higher premiums than traditional Medicare because they usually cover more expenses, including prescription drug costs, vision, hearing, and dental.

However, the overall costs, premiums, plus out-of-pocket expenses for Advantage plans can be lower than Original Medicare because the private insurers manage patient care and limit choices. They assemble networks of hospitals and physicians to control their costs and reduce their customer's premiums. They also restrict access to certain providers and increase the cost of care obtained out-of-network.

Traditional Medicare allows people to seek care from any provider participating in Medicare, which includes virtually all hospitals and physicians.

Medigap

Medigap is a co-insurance or supplement to Original Medicare. You can enroll when you first enroll in Part B. It is also available through Medicaid, a union, or a former employer when you qualify for both programs. You can’t have both Medicare Advantage and Medigap plans. Medigap helps cover expenses that Original Medicare does not cover, such as co-pays and deductibles. Due to the enrollment restrictions, you should strongly consider Medigap when you first become eligible.

The Right Choice for You

With all the different plans, parts, choices, and restrictions, it is crucial to consider your priorities for care. Limited access to doctors and hospitals may become important if you need specialized medical care, such as cancer treatment. Before enrolling, consider what specialty hospitals are included in Advantage plans. Likewise, Advantage plans can make it difficult to see a specialist for ongoing and chronic conditions due to limitations in long-term care services. An estate planning lawyer or elder law attorney can help address long-term care planning and the potential to qualify for Medicaid when necessary.

The Kaiser Family Foundation has put together a cost analysis to help you determine when Medicare Advantage would save you money. As you can see, the longer you stay in the hospital, the less advantageous an Advantage plan becomes.

Consumer Reports notes that the JAMA reported that seniors on Advantage plans often get more preventive care than those on traditional Medicare plans. JAMA published a comprehensive paper about how Medicare plan choice affects spending and discovered that Medicare Advantage enrollees usually spend less.

A Guide in Choices after 65

Enrolling in the right Medicare coverage is one of many decisions that will affect your quality of life in your senior years. We are here to help you navigate a wide variety of choices.

If you have questions or would like to discuss your legal matters, please do not hesitate to contact our office at 215-364-1111 to schedule a consultation.

- Medigap, Medicare Advantage, and Traditional Medicare

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CLIENT Testimonial

Sometimes after a loved one passes away, the family learns of things they were unaware of while the loved one was living. This was the case for one of our clients, Sam, after his father Tom Jr. passed away. Sam was always under the impression that the home he had grown up in, and that his father had lived in until his death, was owned by Tom Jr. To say it came as a surprise that it was indeed Sam’s grandfather, Tom Sr., who was the actual owner of the home, is an understatement.

Apparently, when Tom Sr. had passed away nearly 40 years ago, there was no proper estate plan established. Now, Sam would need to open his grandfather’s estate, resolve tax issues that were never addressed, and then go through the legal process to make the home a part of his father’s estate. At first, Sam believed that the entire process would be easy enough for him to handle on his own. However, after digging a little deeper, he quickly realized he would need the help of a knowledgeable and experienced attorney.

Sam reached out to Scott Bloom Law and we developed a game plan for moving forward. We began by probating Tom Jr.’s will and, after some time, we were able to settle the estates of both Tom Sr. and Tom Jr. While it was no fault of Sam, this is a great example of the importance of having an Estate Plan in place. No one wants to leave their families in precarious situations after they pass. The long-term purpose of setting up an Estate Plan today is to preserve as much of your wealth as possible for the intended beneficiaries and retaining a capable attorney can help ensure all of your wishes are met.

At Scott Bloom Law, we are a team of advocates who care, always fighting for what’s best for our clients and their families. With knowledge, experience, and compassion, we strive to find solutions that make the aging process as emotionally and financially easy as possible. Visit us at scottbloomlaw.com or call 215-364-1111, to talk to find out more.

- Case Study: Estate Administration

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