Estate Planning Advisor Charitable Remainder Trusts: An Option to - PDF document

miller nash llp | Fall 2014 brought to you by the trusts & estates practice team Estate Planning Advisor Charitable Remainder Trusts: An Option to Consider are met, the grantor receives a current initial net fair market value of income and gift tax deduction for the the assets transferred origi- value of the charitable remainder inter- nally to the CRAT. by Kay B. Abramowitz est and pays gift tax on the present value » The charitable remainder uni- kay.abramowitz@millernash.com of the noncharitable interest going to 503.205.2336 trust, or CRUT, distributes to someone other than the grantor. the noncharitable beneficiary • Transferred assets. The assets Those wishing to sell and diver- at least annually a set percent- transferred to a CRT must qualify sify highly appreciated assets (stocks, age of the annual valuation of for a charitable deduction. real estate) and those who have lots the trust assets. The annual • Noncharitable interest. Typically, of taxable income should consider a distribution must be not less charitable remainder trust (“CRT”) to the noncharitable beneficiary is than 5 percent or more than minimize income tax on capital gains the grantor or the grantor and the 50 percent of the annual fair as well as gift and estate tax. grantor’s spouse. But the nonchari- market value of the trust as- table beneficiary can be another sets. A popular variation of the Why? family member, such as a child, CRUT is NIMCRUT, which Because the CRT is not income- sibling, niece, or nephew. The gift distributes to the noncharitable taxed, the sale of such assets does not to the spouse qualifies as a marital create income tax on the capital gains. deduction, and the gift to another (continued on page 6) The capital gains will be taxable to the member of the family is a taxable grantor (or the grantor’s spouse) only gift that may be excluded by the as distributions are made as part of the inside this issue annual exclusion ($14,000 per annual distribution. In addition, the year) or applied against the federal 2 Oregon’s Natural Resource grantor receives a charitable deduction Credit Can Slash Estate exclusion (currently $5,340,000). Taxes against current income that can be • Amount received by noncharitable carried forward for up to five years. 3 To Gift or Not to Gift? interest. There are two types of And the asset is out of the estate of the 4 Where Is the Value in Exit CRTs and several variations on grantor for estate tax purposes. Planning? these two types. What are CRTs? 5 The Vacation Home: » The charitable remainder Planning for the Next In a CRT, assets are transferred to annuity trust, or CRAT, must Generation an irrevocable trust for the benefit of a distribute to the noncharitable noncharitable beneficiary who receives beneficiary a fixed amount or a an amount from the trust for a certain fixed percentage at least annu- period and for one or more qualified ally. The annual distribution charities that receive the assets remain- cannot be less than 5 percent ing in the trust. If all the requirements or more than 50 percent of the www.millernash.com

Oregon’s Natural Resource Credit Can Slash Estate Taxes 3. The NRC is also limited to the should review your situation with first $7.5 million of NRC Property. your tax advisor to determine whether you would qualify for the NRC and, 4. The NRC Property must have by Ronald A. Shellan as needed, adjust the ownership and operated for five of the last eight years ron.shellan@millernash.com operation of property to qualify for the 503.205.2541 by the decedent immediately before NRC. If appropriate, adjust the amount death or by a member of the decedent’s of your cash, marketable securities, and As of January 1, 2012, Oregon’s es- family. life insurance that might be used to tate tax adopted a very significant credit 5. Following death, the NRC pay estate taxes to reflect the reduced to owners of natural resource assets. Property must be inherited by the Oregon estate tax bite. If you were In fact, for those who qualify, Oregon’s decedent’s family and must continue to considering gifting qualifying NRC Natural Resources Credit (the “NRC”) be used in the farm, forestry, or fishing Property to a family member, note will eliminate any estate tax on qualify- business for five of the eight years fol- that such a gift will not save Oregon ing natural resources property (“NRC lowing the decedent’s death. estate taxes, which might have been Property”). If the NRC Property is sold after a primary consideration in making The NRC is available for three gen- the death of the decedent, there will be such a gift. In some situations, it may eral classes of NRC Properties: forest- a recapture of the tax. An annual form make sense to exchange on a tax-free lands, agricultural lands, and fishing- must be filed certifying that the NRC basis nonqualifying real estate assets related assets. More particularly, the into NRC Property to avoid NRC applies to forestland Oregon estate taxes at death. or forestland homesites, “If the NRC Property is sold after the It may also be important timber, crops, fruit or other to provide in your will or death of the decedent, there will be a horticultural products, for- revocable trust that any estry business or farm busi- recapture of the tax.” recapture of Oregon estate ness equipment, livestock, taxes be borne by the child nursery stocks, and fishing or children who inherited boats, gear, and equipment. It also Property has not been disposed of. A the NRC Property. Finally, make sure applies to working capital used in the tax-free exchange or condemnation of that a family member, instead of an qualifying activity of up to 15 percent of the NRC Property either before or after employee, materially participates in the value of the assets (but limited to the death of the decedent is ignored if running the NRC Property if you can $1 million). both the relinquished and replacement no longer do so. The NRC is also available to estates property was qualifying farming, fish- In the right situation, the NRC can owning an interest in corporations, ing, or forestry property. significantly reduce estate taxes. For partnerships, and limited liability We have been involved in one larger an estate that held exactly $7.5 million companies that own NRC Property, if at estate that made significant use of the in such assets, the savings would be at least one member of the family partici- NRC. We discovered quite a number of least $750,000 in Oregon estate taxes pates in the entity’s operation. issues and technical problems with the (Oregon tax rates start at 10 percent There are, of course, a number of drafting of the statute that needed to for estates of $1 million and increase to additional requirements and limita- be resolved. We found that the Oregon 16 percent for estates of $9.5 million or tions to being able to utilize the NRC: Department of Revenue responded to more). But note that the benefit of the our questions and took positions that deduction may be reduced, since the es- 1. The adjusted gross estate logically interpreted the statute to fol- tate taxes paid to a state are deductible (value of assets less debt and certain low the obvious intent of the Oregon for federal estate tax purposes. Because deductions) must be less than $15 mil- legislature to not tax NRC Property. the NRC can result in significant estate lion. tax savings, proper planning with a What practical planning can you 2. The value of the NRC Property trusted tax advisor to utilize the NRC is do to take advantage of the NRC? You must exceed 50 percent of the adjusted strongly advised. gross estate. 2 | miller nash llp | Estate Planning Advisor