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A corporate trustee and charitable giving

By Nando Fratangelo

Have you named a spouse, child, or another relative or friend to succeed you as a trustee of a living trust? That’s a great way to make sure trust decisions are made with an eye toward a personal understanding of your beneficiaries and their needs. But even financially sophisticated individuals often find managing a trust to be both complex and burdensome.

Have you considered naming a corporate trustee to help provide management expertise for your trust assets? As co-trustee with a family member or friend, a corporate trustee can offer several benefits:

• Confidence and continuity of having a single contact for your relationship.

• Skilled portfolio management.

• A wide array of investment choices.

• Efficient tax management.

• Objectivity to ensure that your wishes are carried out, potentially avoiding conflict among beneficiaries.

• Simplicity and convenience for loved ones who may not be financially savvy or understand what needs to be done.

• Experience in meeting high fiduciary standards of prudence and propriety in managing assets.

Make sure your trustee has the best investment and management experience available. Appointing a corporate trustee as a successor or co-trustee typically requires a simple amendment to your trust agreement. Why not act now to protect your loved ones from an unnecessary burden while protecting your assests?

Consider one possible solution a corporate trustee can bring you: a charitable remainder trust that lets you help others and reduce your taxes. Why not turn your gains into a gift that benefits others as well as you and your family? By establishing a Charitable Remainder Trust (CRT), you can transform your assets into disposable income and at the same time support your favorite charity, college, foundation or other nonprofit organization. Among the advantages are the following.

Tax-advantaged diversification. When the major holding in your portfolio is a highly appreciated asset, you may be reluctant to sell it because of the potentially hefty capital gains tax bill. By transferring it to a CRT, you can convert it into more diversified or potentially higher- yielding income investments—free of capital gains tax.

More spendable income. Because the assets you transfer to the trust aren’t taxed, the full proceeds are available for reinvestment by the trustee. This means you can potentially realize more spendable income from the CRT’s conversion of the asset than if you had sold it yourself.

A current income tax deduction. In acknowledgment of the importance of charitable giving, Congress has made it possible for CRT contributions to be tax deductible. (Your gift may also qualify for state and local income tax deductions.) Deductions are calculated on the present value of your future gift. Generally, the older you are and the smaller your income interest, the larger your deduction will be.

No capital gains tax liability. At the long-term capital gains rate of 20 percent, selling a $300,000 investment with a basis of $30,000 would cost you $54,000 in tax. But because a CRT is tax-exempt, it can sell appreciated assets like these without paying federal capital gains tax (or state and local tax, in most cases).

Tax-free growth to maximize your charitable gift. Undistributed earnings or capital gains in the trust normally accumulate tax-free, allowing them to grow faster than if they were taxed. Income is taxed only when distributed to income beneficiaries.

A smaller taxable estate. Assets you transfer to the CRT are removed from your estate. This allows you to enjoy a stream of income without owning he asset that produces it, and thus avoid estate tax on the asset(s) transferred to the CRT. (Although the estate tax will ease gradually through 2009, it is repealed for only one year: 2010. Barring further action by Congress, it will return in 2011 at 2001 rates.)

The chief benefit of a CRT is that money you’d otherwise have paid in taxes can go to work for the charity of your choice. Here’s how:

• You transfer appreciated assets to the trust.

• The trustee sells these assets and reinvests the proceeds in an income producing investment. Since the assets were held by the trust, there is no capital gains tax on the sale.

• The income beneficiary (who may be you, your spouse, children, grandchildren and/or anyone else you designate) receives income from the trust for life, or a fixed period of 20 years or less. If the income beneficiary(ies) include someone other than you or your spouse, gift taxes may apply.

• At the end of this term, the charity receives the remaining trust assets and the CRT is dissolved. The value of the remainder interest generally must be at least 10 percent of the initial value.

If desired, a CRT can be combined with an Irrevocable Life Insurance Trust. This helps replace the value of the assets you’re giving to charity by providing an estate- and generally income-tax-free [Internal Revenue Code 101(a)] cash benefit to your beneficiaries.

Example: Twenty years ago, Tim bought stock in ABC Company for $300,000. Today, the stock is worth $3 million. Tim has recently retired and would like to increase his income. If he sold his ABC stock, he would incur capital gains tax of $540,000 on its $2.7 million gain. To avoid this tax, Tim transfers his highly appreciated stock into a CRT. Once in the trust, the stock is sold and the proceeds invested in an income-producing portfolio. Since neither Tim nor the trust owes capital gains tax, the entire $3 million can be reinvested. He also receives a substantial income tax deduction equal to the present value of the charitable remainder interest. The example is for illustrative purposes only and is not intended to represent any specific investment. Returns will vary depending upon your individual situation.

CRTs are commonly structured in one of two ways. Choose the security of fixed payments with a Charitable Remainder Annuity Trust (CRAT). A CRAT pays the income beneficiary a fixed dollar amount every year. You select the amount, based on a percentage (not less than five percent or more than 50 percent) of the initial value of the assets placed in the trust.

Or, choose the opportunity for inflation protection with a Charitable Remainder Unitrust (CRUT). A CRUT pays annual income based on a fixed percentage between five percent and 50 percent of the current market value of the trust assets. The asset value and distribution amount are recalculated every year. If the trust’s investments do well, the distribution should increase. However, if the portfolio declines in value, the distribution amount may decrease. By allowing you to participate in the rewards and risks of the marketplace, a CRUT can help your income keep pace with inflation.

Nando Fratangelo is a financial advisor at Pittman Priola Financial Group, a team of financial advisors at Prudential Securities, located in Pittsburgh, Pa.

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