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Charitable Giving Can Be Smart Estate Planning

In addition to the altruistic and goodwill benefits of any charitable contribution, there are generally tax advantages to the donor. When deciding your estate-planning strategies, consider a charitable contribution option, which can help the charity of your choice as well as provide you with a steady stream of income and potential tax benefits.

There are numerous options for setting up a charitable contribution in your estate plan. The easiest is a simple bequest through your will.

Charitable Remainder Trusts (CRTs) Demystified

A CRT is an irrevocable, tax-exempt trust in which you place assets to provide income for yourself during a specific period of time (i.e., your lifetime or a period not to exceed 20 years). After that, 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.

It offers flexibility, a lifetime income stream for you, and significant tax benefits to you and your heirs. Ultimately it may be even more beneficial for you than a simple bequest.

For instance, if you have an appreciated asset like real estate, and you sell the property yourself, you will likely pay a great deal in capital gains taxes. But if you transfer the property to a charity through a CRT, the trustee may be able to sell the property with no gift, estate, or capital gains taxes 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. At the death of the last beneficiary or the end of the trust period, the trust ends. The amount remaining in the trust is distributed to the named charity.

Choose the Trust That’s Most Appropriate For You

A CRT must be either an annuity trust or a unitrust; both allow flexibility in payment options. But there are important differences: They involve income and the 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.

Benefits of a Charitable Remainder Trust

In many cases, there are no capital gains taxes on assets transferred to, and sold through a charitable trust;
Has the potential to generate substantial income for the donor; and
Creates an income tax deduction for the donor.

A unitrust is a more flexible but riskier alternative. 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 additions to the asset base, whereas the annuity trust does not.

A unitrust has greater potential to keep up with inflation because the income payments will increase if the investment grows in value. However, if the value of its assets falls due to market conditions, the income will also decrease. On the other hand, with 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.

CRTs Can Be Complicated

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.

Two Types of CRTs: Annuity Trusts and 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)

More Options for Giving

Though A CRT May Sound Like The Ideal Choice For Your Charitable Bequests And Estate Planning Needs, You Might Also Consider …

Charitable Lead Trust. Unlike a CRT, a charitable lead trust 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 or a fixed percentage of the value of the assets in the trust will be paid to a charity. You pay a discounted gift tax when transferring assets to the trust, and the trust’s beneficiaries ultimately receive any remaining 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. Foundations fell out of favor with wealthier individuals after the Tax Reform Act of 1969 eliminated some of the tax advantages. Today, much of the transfer of wealth to charities includes contributions to existing private foundations.

Charitable Trusts: A Win-Win Strategy

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 the most popular estate-planning tool is the CRT, you might consider the benefits of other charitable trust options as well. Talk to your legal counsel to determine which option is right for you.

Points To Remember

Charitable giving may help maximize your estate-planning strategies.
Charitable contributions are generally 100% deductible from estate taxes.
A CRT offers flexibility, can provide income during your lifetime and significant tax benefits to you and your heirs.
In a Charitable Remainder Trust (CRT), you place assets in the trust, the trustee can sell the assets and set up an investment from which you receive an income stream for a designated period of time.
At the end of the period of time, the remaining assets go to your chosen charity.
A CRT must be either an annuity trust or a unitrust.
Income from an annuity trust is a fixed percentage of the initial fair market value of the assets.
Income from a unitrust is a fixed percentage of the fair market value of the trust assets determined annually.
Because CRTs are irrevocable, once established, you forego rights to any assets placed in the trust.
Other charitable options include a charitable lead trust and private foundations.
Talk to your legal counsel to determine which options may be right for you.

(03/07)

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