Law Offices of Alice A. Salvo Logo

Detailing Split-interest Trusts

12/29/2022 | Trust, Trust Administration

Those in Woodland Hills, CA and all other California cities, who have assets they would like to be managed for the benefit of others may find a trust to be an effective tool at doing so. The same may be said for people who wish to use their personal assets to benefit a favorite charity. Those who would like their trust’s property to do both may be able to do so through a split-interest trust. The Internal Revenue Service defines a split-interest trust as one for which a portion was allowed a charitable deduction, while the remainder may be subject to the same tax requirements as a private foundation.

In simpler terms, with a split-interest trust, one can pass a portion of his or her wealth to a beneficiary while also contributing to a charitable organization. Such trusts are set up using one of two different payment methods. The first is a charitable lead trust, which pays income to a charity for certain period of time, and then sees the remainder interest pass to its beneficiaries. A charitable remainder trust, on the other hand, follows the exact opposite payment method.

According to the California Probate Code, trustees of split-interest trusts are prohibited from engaging in any of the following activities as they are defined by the Internal Revenue Code:

  •          Engaging in self-dealing
  •          Retaining excessive business holdings
  •          Making investments that would makes trust property subject to tax+
  •          Making taxable expenditures

In terms of taxes, the beneficiaries are able to bypass the federal estate tax when they inherit assets from charitable lead trust. The trust donor, however, may have to pay tax on contributions meant specifically for beneficiaries. With a charitable remainder trust, beneficiaries do have to pay tax on their income dispersals.