Americans are some of the most generous givers on the face of the planet. They reach into their pockets and take out their checkbooks on behalf of others more often than any other industrialized nation.

Nationally, charitable contributions make a thunderous plunk in the collection plate. In 2017, individuals were the largest source of charitable giving, contributing a total of $286.65 billion. American corporations followed suit and gave a total of $20.77 billion.

The recipients of this largesse depend heavily upon American generosity. There are approximately 1.6 million tax-exempt organizations in the United States. Public charities reported in excess of $1.73 trillion of total revenues in 2015, with a large percentage of that total coming from contributions, gifts, and grants.

So, there’s a lot at stake for all concerned when it comes to encouraging charitable giving in America. And the Charitable Remainder Trust is one of the most popular ways Americans can donate to their favorite cause while doing well for themselves and their families.

HOW THE CHARITABLE REMAINDER TRUST WORKS

Whether you are a budding philanthropist looking for the best way to contribute to society, or an investor looking for strategies to maximize income and tax breaks, the Charitable Remainder Trust offers a powerful solution to your needs. It combines current charitable income tax deductions and future estate tax deductions with the opportunity to avoid capital gains tax on a highly appreciated asset. It then goes one step further to provide you with a new source of income. A Charitable Remainder Trust delivers best results when benefactors have a highly appreciated asset—such as real estate or stocks—that provides little or no income.

Owning such an asset is a double-edged sword. You can’t sell the asset without experiencing the costly bite of state and federal capital gains taxes. On the other hand, if the asset is still in your estate when you die, it will increase your estate taxes. Of course, you could donate the asset directly to charity and gain an immediate charitable income tax deduction. In one fell swoop, you’d reduce the value of your estate—and thus future estate taxes—as well as avoid capital gains taxes. But you’d miss out on an opportunity to maximize your income. The Charitable Remainder Trust neatly overcomes these problems.

When you create your Charitable Remainder Trust, you transfer your highly appreciated asset to your trust. The asset is usually sold, with the proceeds used to buy income-producing investments. Then, each year for the rest of your life, you’ll receive income from your Charitable Remainder Trust. When you die, your designated charity will receive whatever remains in your trust. Hence the name: Charitable Remainder Trust.

The incentives for using the Charitable Remainder Trust include:

  • An immediate charitable income tax deduction based upon the fair market value of the asset given away (reduced by your received interest—or future income and subject to normal percentage limitations applied to itemized deductions);
  • An opportunity to put the full value of your appreciated asset to work for you and avoid the costly impact of capital gains taxes;
  • A new source of income;
  • And a charitable estate tax deduction on the full fair market value of the asset you’ve donated to the charity when you die.

It may sound like the Charitable Remainder Trust is a complex legal tool. But just the opposite is the case. Working with your estate planning attorney, you can set one up in fairly short order. After deciding which charity you want to support, you then decide who will serve as trustee. The trustee can be you, a bank or trust company, or anyone else of your choosing. The trustee will assist in the valuation of the asset you contribute and will follow your precise directions laid down in your trust documents.

Next, you decide who will receive income from your Charitable Remainder Trust and for how long. This isn’t optional; it’s mandatory. According to the IRS, at least one beneficiary other than the charity must receive income each year. So, determine if you will be the only beneficiary, or if your spouse or children will receive income after you die. Lastly, you decide how you want to receive your income, and how much you will receive each year.

Have questions about Charitable Remainder Trusts? Contact our office at any time to discuss how this tool can fit into your current estate plan.