Leaving your assets to charity after death

I am meeting with a client to sign her trust and other California estate planning documents later today. She has no close relatives so instead is leaving her estate to about 10 different non-profit organizations. Medical research, animals, and educational institutions for this woman. She has a connection to each organization and she is genuinely excited about choosing the charities to receive her estate. On the other hand when she spoke of her family she spoke with disdain. Why leave them anything she asked me!? “They don’t even come to visit me!?” I didn’t try to argue with her but instead just listened. I was happy to write her will and trust to match her charitable wishes and am excited to help her sign the documents. Plus, having no close family she wants me involved after her death to give the money to the charities. That’s great for me as I get to feel like a generous person helping the charities! If you want to talk about your estate plan and your charitable wishes find a qualified California estate planning attorney.

Charitable Remainder Trusts

This is an article written about 10 years ago but the principles remain the same.  Let’s chat about a more updated version of CRUTs and CRATs and how they apply to YOUR estate plan!  -John


Is it possible for you to get a current income tax deduction, avoid the capitals gain tax on the transfer of highly appreciated undeveloped land, increase your cash flow, lower your estate taxes, leave your progeny with more money, and provide a lasting legacy to a deserving charity?     Since Congress introduced the “life income contract” in 1969, all this is possible.  The only change of any significance since 1969 is the name, it is now called the “charitable remainder trust (or CRT).”

At one time CRTs were thought to be just for the very rich making very large donations.  Although these people still use CRTs, they also can be beneficial to people wishing to give money, from a smaller estate.  There are law firms, accountants and other financial advisors with the knowledge and expertise to execute a CRT and make it economically feasible when donating small amounts of money.

Understanding the basics of CRTs can be crucial to you, as this can be a great tool to better your life, the lives of your entire family and a deserving charity.   This is a technical area, which is why an attorney is needed to aid in the process, but I hope this article explains the general concept well enough so you can see how great the CRT is.


A CRT is legally described as a “split interest trust.”  Although this term may sound like complicated legalese, it shouldn’t.  Most property is actually made up of two interests, both an income interest and a remainder interest.  These two interests, although in existence, are usually held together.  The income interest may be thought of as the right to the useful enjoyment of the property (interest, rents, the right to farm a piece of land, etc.) for a period of time.  This period may be measured in terms of years or as a life or joint lives.  The remainder interest is that which remains when the income interest expires.  For example a deceased husband may leave a residence to his wife for her life (a “life estate”).   The husband’s will may then provide for the house to go to his daughter upon the wife’s death (the remainder interest).

The concept of split ownership is combined with the many charitable tax rules to make powerful estate and financial planning tools.    With a CRT one interest belongs to the donor, who can choose to take a life income stream from the trust.  The other interest is to the charity, who will get the entire value of the gifted asset when your client dies.

There are two types of CRTs, one of which must be chosen upon the establishment of the Trust.  The two types are a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT).    Regardless of which is selected the trust can last for a term of years or can be measured by a life or lives.  The type and length of time selected will affect the amount of the current income tax deduction.   That is the longer the income payments are to be made and the more they are to be made for, the less the remainder value will be.  Thus, the less the tax deduction you will get.

A CRAT pays a predetermined sum of money (not less than 5% of the initial fair market value) to the income beneficiary, at least annually, for the term provided for in the trust document.  The payout cannot be changed from the initial stated sum, and for this reason additional contributions can not be made to the trust.

A CRUT is a trust from which a fixed percentage (not less than 5% of the fair market value, valued annually) is to be paid to the income beneficiary, at least annually, for the term provided for in the trust document.   Since the CRUT payout can fluctuate, annual contributions are allowed to increase the amount in the trust, and thus get subsequent income tax deductions.

One of the few risks of employing a CRT is early death by grantor and spouse, because all the money in the trust goes to charity at the second death. Many people hedge the risk of early death with life insurance, placed in an irrevocable trust.  Either first to die or second to die policies can be used to replace the risk, and usually by using only a small fraction of the annual payout from the CRT.  Part of the extra income that will be earned by the CRT through income deferral can be used to pay the premiums on such policies.  The life insurance can end up being “free” in effect.



There are many advantages to donating money to a worthy charity, through a charitable remainder trust, in addition to the great feeling one gets when giving to any of a variety of charities.  These include: tax free asset conversion, current tax deduction, as well as gift and estate tax savings.

Tax free asset conversion means you can use a CRT to sell highly appreciated assets free from the erosion of capital gains or ordinary income tax and then provide the lifetime recipients with an income stream.  The lifetime payments can be used to fund a completely different form of investment, thus enabling a person to diversify their holdings, again without paying capital gains taxes.

Like all charitable contributions, gifts to CRTs can provide you the donor with a current income tax deduction.  This deduction can be used to offset all forms of income, under the normal deduction rules.

In addition to providing a significant increase in current income, another increasingly common use of CRTs is to use them to provide retirement or other deferred income.  Unlike qualified plans, the tedious approval, reporting  and non-discrimination rules are not of concern.  Further, there are no excise tax penalties for excess distributions if the Unitrust is selected.

The CRT can provide that a deficiency in income be made up in later years when the CRT’s income exceeds the fixed percentage.  This is known as  a “makeup” feature, and is an integral part in using a CRT as a retirement plan. With a Unitrust, the                                                                                                                                                                                     grantor can give some every year, getting a deduction for each contribution.   The money can be invested in zero coupon bonds, growth securities, or real estate until retirement.  At that time the trustee can move the investments into income producing assets for the retirement years.  Through the use of the CRT you get the opportunity for the tax deferral of income, plus a current tax deduction!


Actual numbers are probably the best way to demonstrate the advantages of a CRT.  Let’s assume you are fifty years old, in a relatively high income tax bracket, and have a piece of land with a fair market value of $100,000, a basis of only $10,000, and not producing any income.  If your choices are to sell the asset today or put it into a CRT, which benefits you the most?

By selling it today, you will have $90,000 subject to the capital gains tax of  20%, thus reducing your actual investment to $82,000.  You can invest this $82,000 for life at 8%, giving you approximately $200,000 of income during your normal life expectancy, thus leaving you with an estate of approximately $290,000.  It is not as hard as it once was to get into the 50% estate tax bracket, thus leaving your heirs with $145,000 from your old $100,000 asset.

By putting this money into a Charitable Remainder Trust, you will end up benefiting your heirs more, and will give money to a worthy charity.  Our $100,000 asset can be put into the trust, and sold.  There will be no capital gains tax, as it is a qualified charity selling the asset, and thus not subject to income taxes.  You thus have $100,000 to invest, again at 8%.  In addition to this you can invest the money saved by the charitable deduction.  The deduction will not be for the full $100,000, but will be for the present value of the future gift.  Let’s assume for our purposes this deduction will equal $16,500, thus freeing up an extra $6,400 to invest ($16,500 X 39% Tax Bracket).  The CRT can now invest $106,400, at the stated 8%, making payments to you for your life.  This will give you cash flows totaling approximately $275,000.  Assuming again a 50% estate tax bracket, your heirs get $137,500, plus the charity you chose gets $100,000.  Almost identical to the above scenario, and you have benefited a charity too!  The only loser in the deal is the government!

A common investment vehicle used in conjunction with the CRT is an ILIT, or Irrevocable Life Insurance Trust.  This can increase the amount of money passing to your heirs, as you can give the annual payments from the CRT to the ILIT.  The ILIT buys life insurance on your life. This insurance builds income tax free, and assuming the ILIT is set up properly, will pass the entire proceeds of the life insurance policy estate and gift tax free to your heirs.


If properly drafted and administered, a Charitable Remainder Trust can provide an opportunity to benefit a deserving charity, such as UC Davis or any other charity you choose, as well as the grantor and the grantor’s heirs.  The IRS has explicitly provided for CRTs as an acceptable planning technique, even issuing prototypical trusts in the Internal Revenue Procedures.


Boldt, Lance, Charitable Remainder Trusts, 1994.

Breen, Joseph, Gertz, Theodore, and Nyberg, David, Charitable Trusts Are an Alternative to Qualified Plans, Taxation for Accountants, July 1991 Pg. 20.

Business Week, Good Donations, Great Deductions, July 24, 1990, Pg. 65.

CCH Federal Tax Service.

Feinman, Ron, Charitable Remainder Trust, 1994.

Hoffman, Marc and Hoffman, Leland, Jr., Harnessing the Power of the Charitable Remainder Trust, 1994, Philanthrotec, Inc.

Internal Revenue Code.

IRS Official Regulations.

McDonald, Joseph F., III, Estate Planning Strategies under the Clinton Administration: A Client’s Guide, CLU Journal, July 1994.

Oshins, Steve, The Cahritable Remainder Trust, Lecture Notes March 1995.

Oshins, Steve, The Private Retirement Plan, Law firm of Oshins & Gibbons, Las Vegas, Nevada, 1995.

Steve Jobs Estate Plan

I pulled this snip-it off of Reuters.com regarding Steve Jobs’ death:


Jobs, in his trademark uniform of black mock-turtleneck and blue jeans, was deemed the heart and soul of a company that rivals Exxon Mobil as the most valuable in America.  With an estimated net worth of $7 billion — including a 7 percent stake in Walt Disney Co — it was not known how Jobs’ estate would be handled.  The entrepreneur had sometimes been criticized for not wielding his enormous influence and wealth for philanthropy like Warren Buffett and Bill Gates. His death revived speculation that some of his estate might be donated to cancer research groups or hospitals.  California law requires a will to be filed in probate court within 30 days of death.  Jobs and his wife placed at least three properties into trusts in 2009, which legal experts say is a sign he may have been preparing his assets to remain confidential upon his death.  Placing stock and real estate into trusts can both minimize estate taxes upon a person’s death, and keep them from being publicly disclosed in probate court, said John O’Grady, a trusts and estates attorney in San Francisco.”

This raises the question what did Steve Jobs really do for his plan and what are some planning tools he should have considered? To state the obvious I have never worked with a client worth seven billion dollars.  I have a lot of clients worth seven million but none with billions.

Most wealthy people start with the idea of REDUCING TAXES.  That’s almost universal and, I should add, with good measure since estate taxes could take away about one half of a large estate. Did you read that right… I said HALF!  Yes, about fifty percent can easily go to estate taxes though that law is an ever-changing target (currently only 35%). Depending on what state you reside in it can be more with state death taxes added in!  As of a few years ago the top federal rate was 55%. That doesn’t even factor in the income taxes on IRAs and 401ks after death!  Ok, ok so reducing taxes is likely important. What could he do?

Well, the reducing taxes often works hand in hand with charitable planning.  If you set up your charitable gifts right with charitable lead and/or remainder trusts you can basically (and I am over-simplying here) give money to charity instead of the IRS and your family can get the same amount.  Just a simple charitable remainder trust backed by a “wealth replacement” trust (aka: an irrevocable life insurance trust) can accomplish this.

What else?  I would probably recommend a charitable foundation.  A charitable foundation would be a way to reduce taxes and give the family a purpose in life. Otherwise with that much wealth you really run the risk of creating kids with no motivation in life.  If you can get them hooked on a family charitable foundation you can keep rich kids interested in life.  It can be there job.

Well, related to above I would also consider an earn out clause in the trust.  That is for every dollar a child earns they get $___’s from the trust.  In a super wealthy family like this maybe it’s $10 or $20 out of the trust for every dollar earned.  So if you make $50,000 as a teacher the trust would give you another $500,000.  Of course we would want to build in some trustee discretion in case the child is unable to work, chooses an especially low paying (but important) job, etc….  I really like earn out clauses for wealthy people to help keep their kids motivated.

Beyond that a lot of the basics would be employed including Qualified Personal Residence Trusts, Family Limited Partnerships, GRATs, and the list goes on.

If you have an estate to plan, even if it’s less than $7b give me a call to see how I can help plan for your family’s future.   -John

Sacramento Charitable Giving

I had the pleasure of going to a presentation yesterday as part of the Sacramento Region Community Foundation’s Philanthropic Advisor’s Forum. It’s a group of other professionals (estate planning attorneys, CPAs, financial planners, etc…) who deal with clients who give to charities.  One speaker, Scott Hanson (from Hanson McClain Advisors), spoke about this new project that kicks off today. It’s called Give Local Now.  There will be billboards, TV ads, radio spots, print ads, etc… about this and all aimed at getting people to keep their charitable donations LOCAL in the Sacramento, Placer, Yolo and El Dorado counties area.  We saw some of the advertisements and they are first class productions!

The gist of it is that Sacramento, on average, gives less money than the rest of the country. Yes, economic times are tough here but the charitable giving even by our high income earners is significantly lower than high income earners elsewhere in the country. Looking at the numbers for our charitable giving was embarrassing!  On top of that a large percentage of people, in our region, give their charitable dollars to charities elsewhere.

This is our region. This is where we live. This is where we raise our kids.  This is where we will grow old.  Next time you are making a charitable donation think first if there is a local alternative!  Give Local Now!

The website is www.givelocalnow.org

I encourage you to look at their website as it’s a great project.

There are a ton of great options for including non-profits in your financial and estate plan.  Charitable remainder trusts, charitable lead trusts, testamentary charitable trusts, direct gifts, and the list goes on and on. If you want to talk about what options might help a local charity and put more money into your loved one’s hands down the road I encourage you to contact an attorney who has been deemed a Certified Specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization.

Lastly, as always, you can contact me with questions or visit our website, www.californiaprobate.infofor more information.


Charitable Giving in California

Today is the grand opening of the Sacramento Children’s Museum.  My wife, Kathleen, is the founder of this museum. I still remember the day in late 2004 or early 2005 that we were driving home from the Bay Area, having enjoyed our visit to Berkelely’s Habitot, we were around Dixon or Davis, and she said, “I want to open a children’s museum in Sacramento….”  That day she called a couple of friends, within a month she had incorporated with the state of California, and filed for 501c3 status with the IRS.   Today, 6+ years later, is a very sweet day for our family. It’s the culmination of years of hard work, ups and downs, good connections, good connections gone bad, people moving, people joining, etc…. However, watching it on the local news this morning was pretty incredible for me and my kids. Shoot, my 8 year old son Michael was ok to change it off cartoons and watch the news for an hour to wait and see the museum on TV… “the museum that mommy owns.”

As an estate planning attorney I help clients do similar things sometimes.  Maybe it’s setting up family foundations during life or to take effect after death.  For others it’s helping to coordinate charitable gifts during life or after death to charities that are near and dear to their heart.  For still others it’s more complex charitable planning with charitable remainder trusts. For all of these tools it’s important to have a licensed estate planning attorney helping. It also doesn’t hurt for that attorney to be a Certified Specialist in Estate Planning Law as I am by the California Bar State Board of Legal Specialization.

Yes, doing your revocable trusts, wills, powers of attorney, etc… are important for avoiding probate, minimizing taxes, and carrying out your wishes. However, charitable work can be the most special for you and your family.

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10.0John Bernard Palley
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