| In addition to the altruistic and goodwill
benefits any charitable contribution brings,
it can also have significant tax advantages.
When deciding your estate-planning strategies,
consider a charitable contribution to help the
charity of your choice as well as provide you
with a steady stream of income and potential
tax benefits.
There are different options for setting up
a charitable contribution through your estate
plan. The easiest is a simple bequest through
your will. Remember that charitable contributions
are 100% deductible from estate taxes.
Charitable Remainder Trusts
What may be even more beneficial for you than
a simple bequest is a charitable remainder trust
(CRT). A CRT offers flexibility, an income stream
for life or a term of years, and significant
tax benefits to you and your heirs.
A CRT is an irrevocable, tax-exempt trust in
which you place assets to provide income for
you during a specific period of time (i.e.,
your lifetime or a term not to exceed 20 years).
At the end of that period, the remaining assets
will be turned over to the charity of your choice.
The trust can be funded with a wide assortment
of assets, including bonds, mutual funds, stocks,
and real estate.
A CRT can offer benefits on a variety of levels.
For instance, if you have appreciated assets
like stock, you will likely pay a great deal
in capital gains taxes when you sell the stock.
But if you transfer the stock to a charity through
a CRT, the trustee may be able to sell the stock
with no gift, estate, or capital gains tax consequences
for the donor. The trustee can then set up an
investment that will provide an income stream
for you, which will be subject to ordinary income
taxes and capital gains. Finally, you’ll be
able to take a charitable income tax deduction
based on the present value of the trust’s remainder
interest.
Designing a CRT
A CRT must be designed in the form of either
an annuity trust or a unitrust. Both allow flexibility
in payment options. The main difference involves
income and fair market value of the assets in
trust. Income from an annuity trust is a fixed
percentage (not less than 5% or more than 50%)
of the initial fair market value of the assets.
This type of trust is best used with assets
that will
be able to generate the required income and
do not fluctuate greatly in value (such as bonds).
The income to the donor is fixed and will not
grow as the asset base grows. Consequently,
the income may not keep up with inflation.
A unitrust is a more flexible but risky alternative.
In a unitrust, the donor still receives a fixed
percentage (not less than 5% or more than 50%)
of the value of the assets in the trust, but
the assets are valued annually, and the donor
receives the fixed percentage of the current
fair market value. This allows the donor to
benefit from any growth in the investment; of
course, there are no guarantees such growth
will occur. The unitrust also allows for additional
contributions to the trust, whereas the annuity
trust does not.
A unitrust has better potential to keep up
with inflation because the income payments will
increase if the investment grows in value. However,
if the value of the assets in the trust falls
due to market conditions, the income also will
decrease. In an annuity trust, the donor is
guaranteed the same income payment regardless
of current asset value and thus is protected
from a possible market downturn. Ultimately,
the choice between an annuity trust and a unitrust
will be dictated by a number of factors as best
determined by your advisory team.
Benefits of a CRT:
- In many cases, there are no capital gains
taxes on assets transferred to a CRT;
- Has the potential to generate substantial
income for the donor; and
- Creates income tax deductions for the donor.
Other Considerations for CRTs
A CRT can be a little involved to set up. By
establishing the trust, you forever relinquish
your rights to the assets you put in the trust.
Another consideration is that your heirs will
not inherit the assets placed in this trust.
Some donors compensate for this by purchasing
a life insurance policy with some of the income
generated by the CRT or by using the savings
incurred by the charitable income tax deduction.
CRTs Must Be Annuity Trusts or Unitrusts
Annuity Trusts
- flexibility in payment options
- fixed income payout
- inflation risk (fixed payout may not keep
up with inflation rate)
Unitrusts
- flexibility in payment options
- variable income payout
- market risk (variable payout can rise or
fall with changing value of underlying assets)
Options for Charitable Giving
Though a CRT may sound like the ideal choice
for your charitable bequests and estate planning
needs, you might also consider these other options.
Charitable Lead Trust (CLT)
A CLT is essentially a CRT in reverse. Unlike
a CRT, a CLT allows you to place in trust assets
that will be left to your heirs; however, you
specify a set number of years during which a
guaranteed amount of a fixed percentage of the
value of the assets in the trust will be paid
to a charity. You pay discounted gift taxes
on assets transferred to the trust and do not
receive a charitable deduction. However, your
heirs ultimately will receive trust assets free
of estate taxes.
Foundations
Another possibility is setting up a foundation
allowing systematic gifts to an area of special
importance to you, the founder. Foundations
can fund college scholarships, research grants,
and the maintenance of collections or real estate,
among others. Although foundations fell out
of favor with some wealthier individuals after
the Tax Reform Act of 1969 eliminated some of
the tax advantages, they are still highly utilized
to preserve and foster an individual’s or family’s
philanthropic legacy.
A Win-Win Proposition
When planning your estate, you should consider
making a charitable contribution. In addition
to the altruistic benefits of donating to charity,
you can also gain significant tax advantages.
Though perhaps one of the more popular estate
planning tools is the CRT, you might consider
the benefits of other options as well. Talk
to your financial advisor or legal counsel to
determine which option is right for you.
Points to Remember
1. Consider charitable giving as a way to maximize
your estate-planning strategies.
2. A CRT offers you flexibility, can provide
income during your lifetime, and offers significant
tax benefits to you and your
heirs.
3. A CRT must be designed in the form of either
an annuity trust or a unitrust.
4. CRTs are irrevocable; therefore, you forgo
rights to any assets placed in the trust.
5. Other charitable options include a charitable
lead trust and private foundations.
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