Many people value charitable giving as part of their personal finances and their legacy after they are gone, but not all of them choose the best ways of accomplishing this. I recently heard a story about a man who held a substantial sum of money in his accounts in the latter years of his life. On many occasions his 6 children urged him to start giving the money away to charities before he passed so that his charitable giving wouldn’t lose half a million dollar to taxes after he passed.
Unfortunately, this man didn’t listen to his children. At his death, his money was doled out to his children, grandchildren, and charities – but only after a significant portion was lost to taxes. Had he planned better, his estate would have had a greater charitable giving impact
Charitable Trusts are the Key to Giving and Profiting
The title to this article may seem to be an oxymoron – but it really isn’t. There is a means by which individuals can donate substantial sums to qualified charitable organizations, receive above-market income returns for the rest of their lives and, if they choose, not diminish the size of their estate being distributed to their children.
Many individuals planning for, and in, retirement have charitable giving as part of their estate plan. Their wills specify that a percentage or specific dollar amount be distributed to a charity or charities at their death. These same individuals are experiencing significantly lower cash flow from their investment portfolios because of the ongoing low interest rate environment.
There is a wonderful planning tool known as a charitable remainder trust. Basically, you create a living trust with you, the grantor, as the income beneficiary for life. At your death, the principal of the trust passes to the charities named in the trust. There are two basic types of charitable remainder trusts. There is the standard charitable remainder unitrust where a designated percentage of the value of the trust on its anniversary date is distributed to the named income beneficiary or beneficiaries. The second type is the charitable remainder annuity trust where a designated percentage of the value of the trust at the time of its funding is distributed annually.
Benefits of Establishing a Charitable Remainder Trust
There are many benefits to establishing a charitable remainder trust. I’ll summarize them by category:
Charitable Remainder Trust Tax Savings:
Funding with Appreciated Assets
The trust can be funded with appreciated assets such as stocks and non-residential real estate, thereby avoiding the payment of capital gains tax and increasing the individual’s tax bracket in the year they are sold.
Charitable Tax Deduction
The grantor receives a charitable tax deduction for the present value of the future gift to charity which, depending on age and the payout rate, could be as much as 50%. You have five years to use up the deduction and you can use it up to 30% of your gross income each year.
Acquisition of Life Insurance
Some people choose to take some, or all, of the funds saved in taxes to purchase life insurance payable to their children to replace the funds gifted. The children receive the insurance proceeds promptly after the death of their parent tax free.
Removal of Death Taxes
The value of the gift is no longer in the grantor’s estate and therefore not subject to state or federal death taxes.
Charitable Remainder Trust Income Stream
The charitable trust guarantees an income stream for life. The grantor can choose an annual payout rate of 4 to 10% from the trust. In an annuity trust the income remains constant based on the value of the trust when funded. In a unitrust the amount of income will vary based on the value of the trust on its anniversary date. In either case the 4 to 10% permissible payout far exceeds current income returns on investment products.
Other Benefits of a Charitable Remainder Trust
The grantor can change the charitable beneficiaries named in the trust during his lifetime as long as they are qualified 501c3 organizations.
The grantor can make additions to a unitrust.
Upon the grantor’s death the trust is not part of the probate estate and the trust can be distributed to the charities much faster than if the gift were by will.
There are few charitable giving planning opportunities where everyone, except the tax collectors, are winners—and a charitable remainder trust is one of them.