If you wish to offer a significant gift to charity, you may want to consider
a charitable trust. Since 1969, countless families have used charitable
remainder trusts (CRTs) to increase their incomes, save taxes and benefit charities.
A CRT allows you to convert a highly appreciated asset, such as a stock
or real estate, into a lifetime income. It essentially reduces your taxes
now and estate taxes when you pass away. Additionally, you pay no capital
gain tax when the asset is sold and lets you help one or more charities
that have special meaning to you.
In order to set up a CRT, you need to initially establish a trust and transfer
to that trust all the property that you wish to donate to charity. The
charity you select must be approved by the Internal Revenue Service (IRS),
which typically means that the charity must be exempt from taxes.
The charity will act as the trustee of the CRT and will be charged with
the duty of investing, protecting, and managing the trust funds. The charity
will pay you, or a beneficiary, a portion of the income that the trust
funds accumulate. These payments are set to last for a finite number of
years, or for the rest of your life, depending on details of the documents.
At the time of your death, the trust will end and the property that you
donated will go to the charity.
The following are the common tax advantages of a charitable trust:
Income tax – For the value of your gift to charity, you are allowed to take
an income tax deduction and disperse it over a period of five years. However,
determining the amount of your deduction is tricky. The value of your
gift is not simply the value of the property since the IRS deducts from
that value the amount of income you’re likely to receive from the
property. For example, if you gave $200,000 but are expecting to get back
$75,000 in interest over the course of your life, your total deduction
would have to be $125,000.
Estate tax – when the trust property eventually goes to the charity outright,
it is no longer in your estate, which means it isn’t subject to
federal estate tax.
Capital gains tax – With a CRT, appreciated property can become cash without having
to pay capital gains tax on the profit. Since charities don’t’
have to pay capital gains tax—unlike people—the proceeds stay
in the trust and are not taxed if the charity sells it.
However, if you do not think that the time is right for you to make such
a large donation, then it isn’t time for you to consider a charitable
trust, either. These trusts are irrevocable, meaning you cannot take back
what you have already given once you start the trust.
If you are interested in setting up a CRT for your estate,
schedule a consultation with our
Springfield, MO estate planning lawyers at
Worsham Law Firm today.