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  • Barry Boscoe

The Benefits of a Split Interest Income Trust for High-Income Individuals

A split interest income trust might be a significant financial tool for:

  1. Those with substantial income,

  2. Those selling high-value assets,

  3. Those with lottery winners.

It offers benefits to both the individual and their chosen charity.

 

In states like California, where the combined marginal tax rate exceeds 50%, and others such as Hawaii, New York, New Jersey, Oregon, Minnesota, the District of Columbia, Vermont, and Iowa, with rates over 45%, managing taxes is crucial. Capital gains taxes can consume a third or more of sale proceeds. However, tax savings reinvested can yield lifelong returns for a family for generations.

 

Many tax strategies involve charitable elements, but one often overlooked is the split interest income trust, a type of pooled income fund (PIF). This trust offers an income tax deduction and provides lifetime income to you (and optionally to your children and potentially your grandchildren), with the remainder going to a designated charity after the last of the beneficiaries' passing.

 

Take, for example, a 49-year-old father who contributes $7 million to a split interest income trust. He gets an immediate $2,171,200 tax deduction and a projected lifetime income of $420,000 per year at 6%, which will also benefit his three children. In some cases, he may be able to maintain investment control and can invest in real estate. With special planning this income may also be tax favored.

 

This trust differs from a charitable remainder trust (CRT) in many ways. One is in the calculation of the tax deduction, which is generally larger for the PIF. For instance, a $1.5 million contribution to such a trust could mean a $983,325 tax deduction, significant yearly tax savings, and a cumulative 20-year income value of over $1 million. This is notably higher than the deductions for similar contributions to CRUTs or CRATs or other forms of charitable trusts.

 

Split interest income trusts and CRTs have both been available since 1969. The key differences are:

  1. CRTs come in various forms like CRATs, CRUTs, and others, all tax-exempt and allowing for contributions of low-basis assets to be sold tax-free. CRTs require a minimum 5% annual payout and an actuarial calculation to ensure a 10% original contribution remainder for charity.

  2. On the other hand, the PIF, is not tax-exempt and has no minimum payout or 10% remainder requirement. It allows for pooling by a single family and doesn’t restrict the age of beneficiaries, enabling multigenerational planning that CRTs usually cannot. If structured properly there may not be any unrelated business taxable income (UBTI) issues.

  3. Particularly beneficial for offsetting high-income-tax events like business or real estate sales and even lottery winnings, the PIF offers larger charitable income tax deductions than a CRT. PIF’s are suitable for multigenerational planning and younger donors, where a lifetime CRT might not meet IRS requirements.

For further insights into the unique advantages of a PIF and other tax planning options, feel free to reach out to us.

Office: 818-342-9950 | Mobile: 818-802-0686

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