Charitable Trusts Legacy
One of the last remaining tax-saving opportunities lies with charitable gifting and most particularly with the use of charitable trusts. Charitable trusts can truly give the "best of both worlds." With a properly planned charitable trust, the charity will receive a much needed gift and the trust income beneficiaries stand to receive increased income after the gifted property is sold and reinvested.
A charitable trust is a great means for transferring an interest in a low yielding, but highly appreciated asset. Through the gift of such an asset, the donor(s) allow the trust to incur any capital gains, for which the trust would have no tax liability, and transform the proceeds into an asset that can provide increased income for the donor or any other designated beneficiary.
A charitable trust is established by an individual or individuals for the benefit of a charity. The trust must be irrevocable and not allow any changes to the instrument. The donor(s) of the trust, or any other beneficiaries of the trust, retain an interest in part of the income stream and the charity will receive the principal of the trust after it terminates, usually after the death of the trust beneficiaries, Often, the trust is funded with appreciated property that may not be providing a high rate of income. When the property is donated to the trust, the donor is given credit for a charitable deduction based on fair market value of the asset placed in trust, discounted by certain factors such as age of donor and surviving spouse and the amount of income interest retained.
After the property is placed in the trust, the trustee will sell the property. Where the donor would be subject to tax on the capital gain from the sale of the asset, the trust, as a charitable asset, would not be subject to this tax. This provides greater monies to be reinvested and a greater amount of earnings for the trust and the income beneficiaries of the trust. The amount of income received by the donor or the designated beneficiaries is determined by the type of trust established. At the time of the termination of the trust, usually at the death of the beneficiaries, the trust will terminate. The assets of the trust will then be distributed to the charity.
Through the use of a charitable trust the donor(s) makes a gift to a charity of a future interest in an asset while retaining the income stream from the asset or the reinvested proceeds from the sale of the asset. The charitable gift can reduce income and estate taxes, and can result in increased cash flow to the donor and the donor's surviving spouse.
The following charitable trusts qualify under current IRS rules as charitable remainder gifts.
- Charitable Annuity Trust. This type of trust provides a fixed income stream to the donor(s) and the surviving spouse based on a percentage of the fair market value of the assets when they are transferred to the trust. The income stream of this trust will not change during the life of the trust, and the donor and the surviving spouse will not share in any growth in the value of the investment portfolio.
- Charitable Remainder Unitrust. With this type of charitable remainder trust, the income will change every year. A gift to a charitable remainder unitrust will provide income to the donor and the donor's surviving spouse based on a percentage of the market value of the assets as determined annually. A charitable remainder unitrust will share in the growth of an investment portfolio with increased income. However, similarly a reduction in the portfolio value will result in a decrease in the income provided by the trust.
- Individuals who want to contribute to a charity.
- Individuals who own highly appreciated assets they do not want to sell because of concern over capital gains.
- Individuals who want to secure a stable income stream.
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