The wealthy have long utilized charitable trusts to meet their philanthropic goals. In 1969, Congress provided tax benefits in the form of income tax deductions and income and estate tax exclusions for the transfer of assets to charitable trusts. Since then, these trusts have steadily gained popularity.
You can use one of several types of charitable trusts depending upon your goals. These trusts can be formed during your lifetime or after death, but all trusts must be irrevocable. Assuming you want to take advantage of these tax benefits during your lifetime, once you are comfortable with not being able to take back the assets, you must decide which type of trust meets your goals.
All types of charitable trusts have two classes of beneficiaries, one class entitled to periodic payments from the trust and the second class receiving the principal. The Charitable Remainder Trust (CRT) is designed to provide you or your designated beneficiaries (for example your children) with income from the trust either for your lifetime or a fixed period of time after which your designated charity receives the remaining principal. A Charitable Lead Trust (CLT) operates in reverse of the CRT in that your beneficiaries receive the remaining principal at your death, while your designated charity receives periodic payments from the trust.
Charitable trusts are further defined by how the periodic payments are determined. You can require the trust to distribute a fixed amount each year (a Charitable Remainder Annuity Trust or a Charitable Lead Annuity Trust). You can also require that the Trust distribute each year a fixed percentage of the trust principal (a Charitable Remainder Unitrust or Charitable Lead Unitrust).
Since Charitable Remainder Trusts (CRT) provide income to the donor or the donor’s beneficiaries, they are much more popular than Charitable Lead Trusts. The following is an example of how a typical CRT might work. Assume you are age 65 and have assets such as marketable securities or real estate worth $500,000 with a tax basis of $200,000. Once you decide which charity to receive the remaining principal, you must decide how much income you or your beneficiaries would like to receive and for what period of time. The unitrust, which pays a percentage of trust assets each year, is usually preferred by relatively young (age 65) donors because of its flexibility.
Assume you decide to receive 5% of the trust’s assets each year. (5% is the minimum). At age 65, you would receive $25,000 (5% of the fair market value of the trust or $500,000). For the rest of your life, you will receive 5% of the value of the trust. Your charitable tax deduction is $225460. If you cannot use all of it in the year you contribute the asset to the trust, you can carry forward the unused deduction for 5 years. Remember, you do not have to pay tax on the $300,000 appreciation in the donated asset and the asset is not included in your taxable estate.
The amount of your charitable tax deduction is directly related to the income you choose to receive. For example, if you chose to receive 8% of the trust’s assets ($40000) in year one, the charitable deduction is only $150,490. The amount of your charitable deduction is also a function of your age. If you wait until age 70 to make the contribution, assuming the minimum 5% payout is selected, your deduction would be $262,565.
Charitable Trusts are by no means for everyone. If you are otherwise charitable minded though,this may be a way to meet your goals with the help of the IRS. As always an attorney familiar with Charitable Trusts should be consulted.
You can use one of several types of charitable trusts depending upon your goals. These trusts can be formed during your lifetime or after death, but all trusts must be irrevocable. Assuming you want to take advantage of these tax benefits during your lifetime, once you are comfortable with not being able to take back the assets, you must decide which type of trust meets your goals.
All types of charitable trusts have two classes of beneficiaries, one class entitled to periodic payments from the trust and the second class receiving the principal. The Charitable Remainder Trust (CRT) is designed to provide you or your designated beneficiaries (for example your children) with income from the trust either for your lifetime or a fixed period of time after which your designated charity receives the remaining principal. A Charitable Lead Trust (CLT) operates in reverse of the CRT in that your beneficiaries receive the remaining principal at your death, while your designated charity receives periodic payments from the trust.
Charitable trusts are further defined by how the periodic payments are determined. You can require the trust to distribute a fixed amount each year (a Charitable Remainder Annuity Trust or a Charitable Lead Annuity Trust). You can also require that the Trust distribute each year a fixed percentage of the trust principal (a Charitable Remainder Unitrust or Charitable Lead Unitrust).
Since Charitable Remainder Trusts (CRT) provide income to the donor or the donor’s beneficiaries, they are much more popular than Charitable Lead Trusts. The following is an example of how a typical CRT might work. Assume you are age 65 and have assets such as marketable securities or real estate worth $500,000 with a tax basis of $200,000. Once you decide which charity to receive the remaining principal, you must decide how much income you or your beneficiaries would like to receive and for what period of time. The unitrust, which pays a percentage of trust assets each year, is usually preferred by relatively young (age 65) donors because of its flexibility.
Assume you decide to receive 5% of the trust’s assets each year. (5% is the minimum). At age 65, you would receive $25,000 (5% of the fair market value of the trust or $500,000). For the rest of your life, you will receive 5% of the value of the trust. Your charitable tax deduction is $225460. If you cannot use all of it in the year you contribute the asset to the trust, you can carry forward the unused deduction for 5 years. Remember, you do not have to pay tax on the $300,000 appreciation in the donated asset and the asset is not included in your taxable estate.
The amount of your charitable tax deduction is directly related to the income you choose to receive. For example, if you chose to receive 8% of the trust’s assets ($40000) in year one, the charitable deduction is only $150,490. The amount of your charitable deduction is also a function of your age. If you wait until age 70 to make the contribution, assuming the minimum 5% payout is selected, your deduction would be $262,565.
Charitable Trusts are by no means for everyone. If you are otherwise charitable minded though,this may be a way to meet your goals with the help of the IRS. As always an attorney familiar with Charitable Trusts should be consulted.
