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What is a Charitable Remainder Trust?

Unique Estate Planning Methods to Secure a Lifetime of Income, Save Taxes, & Benefit the Community

Most people planning for their retirement have a misconception that charitable giving is only for the wealthy.  However, there are several estate planning tools that can benefit your favorite charity while also earning you steady stream of income.  One of these tools is known as a charitable trust remainder, or “CRT.”  A CRT lets you convert a highly appreciated asset like stock or real estate into a lifetime of income. It reduces your income taxes now and may also reduce your estate taxes when you die. When the assets are sold, creators of the CRT escape the ever-daunting capital gains tax.  But best of all, a charitable remainder trust allows you help one or more of your favorite charities.

How does a CRT work?

Creators of a charitable remainder trust transfer an appreciated asset into an irrevocable trust.  It’s important to have assets that appreciate in value in order for a CRT to work effectively.  Assets that have little or no appreciation may be better off going into a charitable lead trust or charitable remainder annuity trust.  In any event, when you transfer an appreciating asset into the charitable remainder trust, it removes the asset from your estate.  Thus, no estate taxes will be due on it when you die.  Most importantly, you also receive an immediate charitable income tax deduction.

After the trust is created, the Trustee sells the asset at full market value.  Again, after the sale you will not pay capital gains tax.  The money is then reinvested and the proceeds from the reinvestment go to you for the rest of your life.  When you die, the remaining trust assets go to the charity(ies) you have chosen.  Hence the name charitable remainder trust.

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Example Using a Charitable Remainder Trust

Let’s say for example that Gail Giver (age 63) purchased some stock for $100,000.  It is now worth $500,000.  She would like to sell it and generate some retirement income.  If she transfers the stock to a CRT, Gail can take an immediate charitable income tax deduction of $90,357. Because she is in a 35% tax bracket, this will reduce their current federal income taxes by $31,625.

The trust is exempt from capital gains tax so when the trustee sells the stock for the full $500,000, all of the money is available for reinvestment.  Assume that the assets will accumulate 5% of annual growth and Gail is expected to live for another 26 years.   Using this information, that produces $25,000 in annual income which, before taxes, will total $650,000 over Gail’s lifetime. And because the assets are in an irrevocable trust, they are protected from creditors.

Example Not Using Charitable Remainder Trust

What would happen if Gail sold the assets and reinvested them herself? If Gail sells the same $500,000 in stock, she would have a gain of $400,000 (current value less cost) and would have to pay $60,000 in federal capital gains tax (15% of $400,000).  That would leave her with $440,000.

If she re-invested and earned a 5% return, that produces $22,000 in annual income.  Using the same life expectancy and 5% annual income as mentioned before, this would give her a total lifetime income (before taxes) of $572,000.   However, because Gail Giver still owns the assets in her name, there is no protection from creditors.  Looking back, without the use of a CRT, she loses $78,000 in income than if she had created a charitable remainder trust.

Comparison of Income after Sale

Without CRT       With CRT

Current Value of Stock                  $ 500,000             $ 500,000

Capital Gains Tax*                           – 60,000                0

Balance To Re-Invest                      $ 440,000             $ 500,000

5% Annual Income                          $ 22,000                $ 25,000

Total Lifetime Income                    $ 572,000             $ 650,000

Tax Deduction Benefit**              $ 0                          $ 31,625

*15% federal capital gains tax only.

(State capital gains tax may also apply.)

**$90,357 charitable income tax deduction times 35% income tax rate.

Are there other options? Of course!  Another charitable estate planning tool is called the charitable lead trust, or CLT.  A CLT is the reverse of a CRT.  This revocable trust provides income to a charity for a set number of years, after which the remainder passes to the donor’s heirs or beneficiaries.  The CLT is a good choice for those who don’t need a lifetime of income from certain assets.  The trust is often structured to get an income tax deduction equal to the fair market value of the property transferred, with the remaining interest valued at zero to eliminate a taxable gift.  Contact an estate planning attorney to learn more about charitable lead trusts.

Finally there is also a trust called the pooled income fund (PIF).  Pooled income funds are trusts maintained by public charities. The trust is set up by donors who contribute to the fund.  Just like a CRT, the donor receives income during his or her lifetime.  After the donor’s death, control over the funds goes to the charity. The biggest benefit to a PIF is that contributions qualify for charitable income deductions as well as gift and estate tax deductions.  Talk with an estate planning attorney to learn more.

As you can see, there are a number of different ways to give to your favorite charity while also planning for a secure retirement. This blog is meant for information purposes only and should not be construed as legal advice.  Contact an estate planning attorney at Baron Law, LLC for a free consultation.  Baron Law, LLC is your Cleveland, Ohio estate planning attorney. Contact Cleveland, Ohio attorney Dan Baron today at 216-573-3723

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Building a Charitable Contribution in your Estate Plan

Estate Planning Charitable Donations

Have you ever considered incorporating a charitable donation into your estate plan?   Aside from the tax benefits, including charitable giving into your estate plan is a wonderful way to extend your legacy and show your generosity.  And contrary to public belief, charitable giving in your estate plan is not just for the very wealthy.   Through an estate planning attorney, there are several good ways to provide for your family while also giving to your favorite causes.

  1. Charitable Contributions through Your Will

The easiest and least complicated way to include a charitable contribution in your estate plan is through your will.  The amount you charitably contribute won’t reduce your income taxes, but it may decrease your taxable estate.  In addition, this may potentially increase the amount you’ll be able to leave to your heirs.  Talk with an estate planning attorney to learn more.

  1. Charitable Contributions through Your Retirement

You can also contribute to your favorite charity by donating a portion of your retirement account. Donating a retirement account is tax-effective and pretty straightforward.   A donor must simply designate the charity as the beneficiary on your account to receive the tax benefit.  Charities are exempt from both income and estate taxes.  Thus, the charity can receive 100% of the account’s value while your children or heirs receive their portion of the estate through non-retirement assets.  Consult with an estate planning attorney to learn more.

  1. Split-interest gift

Another way to make a charitable contribution is through a split-interest gift.  Through a split interest gift, you can donate assets to a charity but may also retain some of the benefits of holding those assets.  Here, the donor opens and funds a trust in the charity’s name and receives a charitable income tax deduction at the time of transfer.  Just like with other trusts, here the donor retains some rights to the property and may be able to avoid capital gains on the assets transferred.  Talk with an estate planning attorney to learn more about split-interest gifts.

Some ways to provide split-interest gifts include:

  • Charitable remainder trust (CRT): A CRT is an irrevocable trust that provides either a fixed payment or a fixed percentage to the donor (or other beneficiary) every year.  The term of the trust can for the life of the donor or a set number of years.   At a minimum, the donor must take annual payments from the trust no less than 5% but no more than 50% of the property’s fair market value.  At the end of the term, the remainder goes to the designated charity.  To maximize payments during the lifetime of the donor, the trust should appreciate value while receiving payments in the form of a percentage.   In contrast, if the trust will not appreciate in value, you’re better off receiving a fixed payment each year. Consult with an estate planning attorney to learn more.
  • Charitable lead trust (CLT): A CLT is the reverse of a CRT.  This revocable trust provides income to a charity for a set number of years, after which the remainder passes to the donor’s heirs or beneficiaries.  The CLT is a good choice for those who don’t need a lifetime of income from certain assets.  The trust is often structured to get an income tax deduction equal to the fair market value of the property transferred, with the remaining interest valued at zero to eliminate a taxable gift.  Contact an estate planning attorney to learn more about charitable lead trusts.
  • Pooled income fund (PIF):  Pooled income funds are trusts maintained by public charities. The trust is set up by donors who contribute to the fund.  Just like a CRT, the donor receives income during his or her lifetime.  After the donor’s death, control over the funds goes to the charity. The biggest benefit to a PIF is that contributions qualify for charitable income deductions as well as gift and estate tax deductions.  Talk with an estate planning attorney to learn more.

Charitable Giving is not just for the Wealthy.

There is a misconception that charitable giving is just for the wealthy; however, this is far from true.  Many people give to their alma mater or local church.  The amount does not need to be in the tens of thousands.  In fact, many people give smaller amounts by simply adding the charity in their will.  This blog is not meant to provide legal advice and is for informational purporses only.  For more information regarding wills, trusts, or charitable giving, contact Cleveland, Ohio law firm Baron Law, LLC.  Baron Law is your estate planning law firm in Cleveland, Ohio.  Call today for a free consultation at 216-573-3723.

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Can a Beneficiary Force a Trustee to Provide Information Contained in a Trust?

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Can a Beneficiary Force a Trustee to Provide Information Contained in a Trust?

In addition to the blog below, do you have questions regarding estate planning or trust administration?  Call Cleveland, Ohio law firm Baron Law LLC.  An attorney at Baron Law will be able to assist you and provide legal advice for all your wills and trust needs.

If you’re resident of Ohio, then as a beneficiary, you have a right to see a trust and can force the trustee to provide you a look.  Under Ohio law, the Trustee is obligated to give a copy of the trust to beneficiaries if they ask for it.  Cleveland, Ohio estate planning attorney Daniel A. Baron points to Ohio Revised Code Section 5808.13 which provides in part

“A trustee shall keep the current beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of the trust.”

The Ohio statute further provides that a trustee must:

“Upon the request of a beneficiary, promptly furnish to the beneficiary a copy of the trust instrument. Unless the beneficiary expressly requests a copy of the entire trust instrument, the trustee may furnish to the beneficiary a copy of a redacted trust instrument that includes only those provisions of the trust instrument that the trustee determines are relevant to the beneficiary’s interest in the trust. If the beneficiary requests a copy of the entire trust instrument after receiving a copy of a redacted trust instrument, the trustee shall furnish a copy of the entire trust instrument to the beneficiary. If the settlor of a revocable trust that has become irrevocable has completely restated the terms of the trust, the trust instrument furnished by the trustee shall be the restated trust instrument, including any amendments to the restated trust instrument.”

Put more simply, if you’re a beneficiary to a trust, you simply need to ask and you will be provided a copy of the trust.  Conversely, if you’re the Trustee and receive one of the requests listed above, you likely have to comply.  Beneficiaries having problems getting information from a Trustee should refer to the above statute.  Trustees who fail to respond risk being removed as the Trustee.  In addition, if there is a law suit, the attorney’s fees would be taken out of the trust, thus reducing the value to all beneficiaries.

This blog is for informational purposes only and is not intended as legal advice.  If you need an estate planning attorney, trust attorney, wills attorney, or other Cleveland, Ohio attorney contact Baron Law LLC at 216.573.3723.  You will speak directly with an Ohio attorney who can assist you with your legal needs.

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What is the Difference Between a Trust and a Will?

This blog will help you understand some of the core differences between a will and trust, but it is not intended to provide legal advice.  If you’re planning for your estate, contact Dan Baron at Baron Law LLC. Call and speak directly with an attorney at 216-573-3723.

Most people have heard the terms “will” and “trust,” but not everyone knows the unique differences between the two.  Both trusts and wills are useful estate planning tools, but can serve different purposes.  Most importantly, both can work together to create a complete estate plan.

The main difference between a will and trust is that only a will passes through probate.  (Visit here for additional information on understanding probate).  Generally, probate is a process that involves the court who oversees the administration of the will and ensures the will is valid. The court will also administer the property making sure it gets distributed the way the deceased wanted.   Thus, an authenticated will will pass through probate while a trust most likely will not.  Courts do not need to oversee the distribution of a trust, which can sometimes save time and money.  In addition, many people favor a trust because they can be very private.  On the contrary, a will can sometimes become public record.

A trust is a legal arrangement where one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.”  A trust usually has two types of beneficiaries — one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.

Another difference between a will and a trust is that a living will goes into effect only after you pass, while a trust takes effect as soon as it is created.  Through probate, a will determines who will receive your property at your death and it appoints a legal representative to carry out your wishes.  This person is called the trustee.   In comparison, a trust may be used to distribute property before death, at death or afterwards.  A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust.

Both wills and trusts each have their advantages and disadvantages.   For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes. (See elderlawanswers.com for more information).

Hopefully this blog has helped you understand some of the differences between a trust and a will.  If you are planning for your estate, or would like additional information, contact Dan Baron at Baron Law LLC.   Call today at 216-573-3723. You will speak directly with an attorney who can help you decide whether a will or trust is best for your estate planning needs.

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Should I get a Dissolution or Divorce?

If you’re thinking of separating from your spouse, you should know the difference between a dissolution and divorce.  In Ohio, knowing the difference can save you both time and money depending on the circumstances.    In addition, understanding the differences will alleviate stress and confusion in an inherently difficult time.

So, what is the difference between a dissolution and divorce? Generally, a husband or wife will file for divorce with the expectation that there will be a battle over children, money, and property.  In Ohio, a husband or wife may file a complaint for divorce in the domestic relations division of the local common pleas court, or if there is no domestic relations division, in the general division of the common pleas court.  When filing for divorce, the plaintiff must allege, and must later prove, one or more of the following legal grounds for divorce:

  • adultery;
  • gross neglect of duty (e.g., failure to support the other spouse);
  • one of the spouses was already married to another person at the time of their marriage to the second spouse (bigamy);
  • willful absence of the spouse from the plaintiff’s home for a continuous one-year period preceding the filing of the divorce case;
  • extreme cruelty;
  • fraudulent contract (fraudulent misrepresentations or promises made to the other party before the parties’ marriage);
  • habitual drunkenness;
  • imprisonment of the other spouse;
  • the parties have for one year, without interruption, lived separate and apart without cohabitation (no-fault divorce grounds); or
  • incompatibility of the husband and wife, if alleged by one spouse in the divorce complaint and not denied by the other spouse (another type of no-fault divorce).

It’s imperative to understand that Ohio is a “no fault” state.  Even if a plaintiff proves one of the above, it generally will not help in the outcome of the case.  For example, even if a spouse was proved to be cheating, Ohio courts typically will not award more money to the non-cheating spouse because of the “no fault” status.   Instead, money and property are distributed based on a number of factors including length of marriage, financial support, contribution, liquidity, liability, and more.  Finally, in Ohio, there are no jury divorce trials. Divorce cases are either settled by agreement of the parties or tried before a trial judge or magistrate.

In addition to the legal requirements above, it’s important to consider the practical aspects of filing for a divorce in Cleveland, Ohio.   If your spouse wants to remain married, a divorce might be a more favorable option because it starts the process immediately with the court.  In comparison, if both parties want to separate, a dissolution might be a better option because it attenuates the inherent litigiousness filing for divorce often brings.

So how is a dissolution much different from a divorce in Ohio?  In a practical sense, a dissolution is filed when both spouses mutually agree that they want to separate.  In addition, a dissolution is generally filed when both parties agree on child custody, spousal support, and asset distribution.

From a procedural standpoint, unlike a divorce, fault grounds are not at issue as described above.  In Cleveland, Ohio (and all Ohio cities), a dissolution petition is not filed with the court until the parties have reached an agreement on all the issues that must be addressed in a divorce matter.  However, designation of a residential parent, parental rights, visitation, child support, spousal support, division of property, payment of debts, and payment of attorney fees are always considered in either a dissolution or divorce.

As you can see, there are numerous factors to consider when thinking about divorce and dissolution.   Baron Law LLC has provided this blog for educational purposes only and it should not be considered legal advice.  Some of the information provided above can be found by visiting the Ohio State Bar Association.   If you are thinking about getting divorced and would like legal representation, contact Dan Baron at Baron Law LLC today.  Call for a free consultation at 216-573-3723.

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What is Probate?