What is a Split-Interest Gift?
by Unbundled Legal HelpJune 2nd, 2021
If you have plans to leave your assets behind to a charity, but you still want a portion of your assets to benefit you and/or other beneficiaries, it can be beneficial to look into split-interest gifts.
A split-interest gift is any “gift” in which a part of it is assigned to a charitable organization while another portion is set aside to benefit the donor (grantor) or their designated beneficiaries. There are many types of split-interest gift vehicles and trusts to include charitable trusts, pooled income funds, charitable gift annuities, etc.
Setting up a charitable trust or any other type of split-interest gift can involve many disciplines such as estate planning, tax law, and business law. It can be helpful to speak with a trust lawyer in your area to learn more about the benefits of split-interest gifts and if they are a good option for your estate planning needs.
Learn more about split-interest gifts below.
Types of Trusts That Allow Split-Interest Gifts
Split-interest gifts are often attributed to certain types of trusts. These types of agreements typically stipulate a giving arrangement (contribution) in which benefits are shared by an organization and other beneficiaries. In some cases, donors set up split-interest vehicles so they may also receive a benefit until their death. They are often used to financially protect individual estates.
Trusts created with split-interest agreements come in two forms, revocable and irrevocable. If they are revocable, then they can be changed, modified, or revoked by the grantor at any time. On the other hand, an irrevocable trust cannot be revoked or changed except under rare circumstances.
Some of the most common types of split-interest trusts include charitable lead trusts (CLT), charitable remainder trusts (CRT), grantor retained annuity trusts (GRAT), qualified personal residence trusts (QPRT), and perpetual trusts. Learn more about these below.
Charitable Lead Trusts/Charitable Remainder Trusts
Split-interest charitable trusts allow you to leave your assets and property behind to designated beneficiaries (spouses, children, family members, etc.) in a way that is tax-efficient while also allowing you to financially support your favorite charity, now or in the future.
Charitable Lead Trusts (CLT)
Charitable lead trusts are created to pay in two ways. They include a fixed-annuity or UniTrust payment to the charity. With a fixed annuity payment, the designated charity receives a fixed amount each year (for as long as the agreement stipulates) regardless of whether the assets increase or decrease in value.
A UniTrust is a type of CLT in which the charity will receive a fixed percentage of the market value of the assets each year. So, if the assets within the trust appreciate, they will receive more. If they depreciate, the charity will receive less.
In both cases, the trust will make payments to the designated charity for a specific number of years. Afterward, the assets remaining in the trust will go to the heirs. People that form these types of trusts typically do so for the following reasons:
They expect the assets placed in the trust to appreciate over time
They have young children or other beneficiaries that are not yet ready to receive a large amount of money
They want to avoid federal estate taxes (if they have a large estate)
Charitable Remainder Trusts (CRT)
A charitable remainder trust is essentially the opposite of a CLT. Assets within this type of trust are paid to beneficiaries first and the remaining assets are then awarded to a selected charity. A major benefit of CRTs is that they are tax-exempt.
That can be helpful for donors who wish to sell appreciated assets and reallocate funds to a more diverse portfolio or create an income stream for themselves/beneficiaries. A CRT also allows for tax deductions that are equal to the value of the charitable remainder interest accrued in the trust.
Grantor Retained Annuity Trust (GRAT)
A grantor retained annuity trust (GRAT) is a financial tool used in estate planning that can help to minimize or eliminate gift taxes on substantial financial gifts to family members. A GRAT is a type of irrevocable trust that is created for a specific time. When the trust is created, the grantor pays taxes on the assets upfront.
The assets are placed in the trust, then an annuity is paid out annually to the beneficiaries. The annuity is based on interest accrued by the assets during the year. When the GRAT expires, the beneficiaries receive the remaining assets from the trust tax-free.
One significant drawback to creating a GRAT is that if the trust creator dies before the trust expires, the assets become part of their taxable estate and the beneficiaries will not receive any benefits.
Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust is another type of revocable trust. It allows the trust creator to remove their home from the estate to reduce the gift taxes that are incurred when transferring their home to beneficiaries.
QPRTs allow the homeowner/trust creator to stay in the home for a specified time with a “retained interest” in their home. When that time expires, the remaining interest (sometimes called “remainder interest”) is transferred to the beneficiaries.
A qualified personal residence trust can help lower gift taxes since the owner of the home only retains a fraction of the total value.
Perpetual trusts (also called dynasty trusts) are a type of trust that can continue for as long as the need for the trust exists. It can last for the lifetime of the beneficiaries or the term of the charity.
Many create this type of trust for descendants, as long as the terms of the trust do not violate the current rules against perpetuities. These types of trusts are typically reserved for high net-worth estates of $10 million or more.
Other Split-Interest Gift Giving Tools
While trusts are the most popular, they are not the only types of split-interest gifts. Those who are not interested in creating a trust, but want to give to a charity while receiving some type of benefit may be interested in a charitable gift annuity or a pooled income fund (PIF). Learn more about each below.
Charitable Gift Annuity
A charitable gift annuity is a type of contract created between a donor and a charity. The terms of the charitable gift annuity include a donor giving a substantial gift to a charity (cash, assets, securities, etc.). In return, the donor becomes eligible to receive a partial tax deduction as well as a fixed stream of income from the charity for the rest of their life.
The minimum gift amount for a charitable gift annuity is $5,000 but is typically much larger. Some of the payments received by the donor may also be tax-free depending on the life expectancy of the donor.
Pooled Income Fund (PIF)
A pooled income fund (PIF) is a type of trust that is typically created and maintained by a large public charity. The PIF receives payments from multiple donors for investment purposes. Each donor is then assigned “units of participation” based on their contribution amount.
The net investment income from the fund is then distributed to each participant annually according to their level of participation in the fund. These payments are made for the lifetime of the donor. After they pass away, their portion of assets is severed from the fund and used for charitable purposes.
In many ways, a PIF is the same as a charitable remainder mutual fund. Payments made to a pooled income fund qualify for charitable income, estate tax, and gift tax deductions. A PIF can also be used to avoid capital gains taxes in certain situations.
Drawbacks to Setting Up a Charitable Split-Interest Trust
Creating a charitable split-interest trust can be helpful for donors, beneficiaries, and charities. However, there are a few potential drawbacks. They include:
They typically require large contributions
The trust creator may lose control of their assets
You cannot change the terms of the trust if you want tax benefits
Most people don’t reap estate tax benefits because their estates are not large enough
The value of the gift may be reduced by the income you receive
Higher payments received may leave little to nothing for the charity
Charitable split-interest trusts are great estate planning and financial tools, but they are not for everyone. Consult with an estate planning lawyer to help you decide if they are a good option for you and your beneficiaries.
Do I Need a Lawyer to Set Up a Split-Interest Trust?
Yes, you will need an estate planning lawyer experienced with the complexities of setting up a split-interest trust. Since they involve charitable organizations, beneficiaries, and yourself, the process can be complicated. Estate planning lawyers can be helpful in many ways when setting up a split-interest trust. Such as:
Interpreting your state’s laws and how they apply to your split-interest gift
Drafting and reviewing paperwork and documentation
Setting up accounts
Ensuring that the creation of the trust is in your best interest
Minimizing or eliminating certain taxes
Setting up rules, procedures, and requirements for beneficiaries
Holding the charity and designated trustees accountable
While an estate planning lawyer is usually necessary, they can be expensive. Setting up a split-interest trust typically costs $3k - $7k (sometimes much more). In addition, many lawyers charge an hourly fee as well. Before hiring a lawyer, it can be helpful to gain an in-depth understanding of their fee structure and what you can expect from them.
Save Money With an Unbundled Lawyer Today
Split-interest gifts are only one part of a comprehensive estate plan. Before creating a trust or other type of split-interest gift vehicle, you will need a will, and potentially other types of trusts, with many estate-planning documents.
With unbundled legal services, you can hire an estate planning lawyer in your area to handle the complex parts of estate planning, while you save money by taking care of the rest. Fees for unbundled lawyers start as low as $500 - $1500.
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Before you spend thousands of dollars in upfront fees, contact one of our unbundled lawyers for a free consultation and learn how you can save money.