Split-interest vehicles are used to designate two beneficiaries: one current and one remainder. The current beneficiary receives an annual payout stream from a trust, typically the donor, during his or her lifetime. The remainder beneficiary receives the assets left in the trust at the conclusion of its term.
There are four major types of split-interest vehicles. They all offer potential tax benefits, and you should discuss your individual situation with your tax or legal advisor to determine what those benefits are.
A charitable gift annuity is a special type of agreement designed to provide you with the benefits of a traditional annuity but give the underlying asset to charity. In exchange for a gift of cash or securities (some states allow the gift of closely held stock or property), you will receive annuity payments for life from your selected charity. The lifetime annuity payments will start at the time of your choosing. Typically, tax advantages include a current income tax deduction and favorable tax treatment of the annuity payments, depending on your specific situation. Many charitable gift annuity programs permit donations as low as $10,000.
Charitable lead trusts (CLTs) are generally more attractive during periods of low interest rates. A CLT works as follows: You fund the trust, preferably with an asset expected to appreciate; the charity receives a fixed annual payout from the trust; and the remainder goes to your beneficiaries at the end of the charity’s payout term. The primary benefit of a CLT lies in its gift tax consequences. The value of the donor’s initial gift to the trust is determined by a government-set rate, the term of the trust and the payout to charity. When this rate is low, the value of the donor’s gift is reduced for gift tax purposes.
A pooled income fund allows you to “pool” together cash or securities to create one large gift for charity. The charity then reinvests these assets as a pool. The fund’s annual income is paid to you or your beneficiaries, based on your share and/or each beneficiary’s share of the pool. Upon the death of the fund’s beneficiary (or beneficiaries), the remaining share of the pool is transferred to the charity. Pooled income funds generally are beneficial for investors who wish to make small gifts to charity (subject to the charity’s own minimums) while still receiving income from the gifts.
Marie A. Moore is a Financial Advisor with the Wealth Management division of Morgan Stanley in Dallas, Texas. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC. Member SIPC. www.sipc.org. Morgan Stanley Financial Advisor(s) engage Worth to feature this profile. Marie A. Moore may only transact business in states where she is registered or excluded or exempted from registration, www.morganstanleyfa.com/themooregroup. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Marie A. Moore is not registered or excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the United States. (CRC1312195 11/15).
This article was originally published in the December/January 2016 issue of Worth.