As the name implies, a split-interest agreement is a legal arrangement where the ownership or control of an asset is divided between two or more parties. This type of agreement is often used for estate planning or charitable donations, and it allows individuals to achieve certain financial or tax-related goals while still maintaining a degree of control over their assets. In this article, we will look at some of the common types of split-interest agreements and the benefits they offer.
Charitable Lead Trusts (CLTs)
A charitable lead trust is a type of split-interest agreement where assets are transferred to a trust that generates income for a specified period. The income generated is then donated to a charity of the donor`s choosing. After the specified period expires, the remaining assets are passed on to the donor`s beneficiaries, usually their heirs or family members. CLTs offer several benefits, including reduced estate taxes, charitable giving, and the ability to transfer wealth to heirs at a lower tax cost.
Charitable Remainder Trusts (CRTs)
Charitable remainder trusts are the inverse of charitable lead trusts. In this arrangement, a trust is created that provides income to the donor or their designated beneficiaries for a specified period. After that period, the assets in the trust are donated to a charity. CRTs offer several benefits, including reduced estate taxes, charitable giving, and the ability to receive income from the trust during the donor`s lifetime.
Pooled Income Funds
Pooled income funds are a type of split-interest agreement where donors contribute cash or securities to a pool, which is then invested in a portfolio of stocks, bonds, or other assets. The income generated from the investments is then distributed to the donors based on their share of the pool. Pooled income funds offer several benefits, including reduced estate taxes, charitable giving, and the ability to receive income for life.
Remainder Annuity Trusts (RATs)
A remainder annuity trust is a type of split-interest agreement where assets are transferred to a trust that generates income for the donor or their designated beneficiaries for a specified period. After that period, the remaining assets are passed on to the donor`s beneficiaries, usually their heirs or family members. RATs offer several benefits, including reduced estate taxes, the ability to transfer wealth to heirs at a lower tax cost, and the ability to receive income from the trust during the donor`s lifetime.
Conclusion
Split-interest agreements offer a unique way for individuals to achieve their financial and charitable giving goals while still maintaining a degree of control over their assets. By understanding the different types of split-interest agreements available, individuals can choose the arrangement that best suits their needs. Whether it is a charitable lead trust, a charitable remainder trust, a pooled income fund, or a remainder annuity trust, each of these arrangements offers unique benefits and disadvantages that should be carefully considered before making a decision.