Charitable Remainder Trusts Provide Financial As Well As Charitable Benefits
(Denver) - Perhaps you have the following problem.
You've accumulated considerable assets over a lifetime of working and investing.
Now you face a potentially large estate tax bill if you keep those assets until death, or a large capital-gains tax if you sell them.
At the same time, you may be looking for a way to boost your retirement income.
One solution to this situation may be to give away those assets.
That's right, give them away.
If you have a favorite qualified charity or nonprofit institution you'd like to benefit, such as a university, hospital, or church, an estate planning tool that might help you and the charity is the charitable remainder trust.
"People think of the charitable remainder trust primarily as a tool for the charitably motivated, and obviously that motivation is critical," says Gregg Parish, JD, an academic assistant at the College for Financial Planning®, a division of the National Endowment for Financial Education® (NEFE®).
"What many people don't realize is the important financial benefits for the donor as well."
The charitable remainder trust (CRT) works as its name implies.
You donate an asset such as stocks or real estate to a charitable trust.
It sells the assets and reinvests the proceeds in income-producing assets.
The donor receives income payments for a lifetime, or a predetermined time period, and at death or the end of the trust term, the remaining assets (remainder interest) pass on to the charity.
Parish says this strategy provides financial benefits for the donor in four main ways:
You receive income for life, or for the term of the trust (say 10 or 20 years).
You avoid paying a capital-gains tax on any appreciated assets you donate.
The charity, in turn, ends up with a larger donation than if you'd sold the asset first and then given them the after-tax proceeds, because the charity can sell the asset free of tax.
"Appreciated assets, such as real estate or stock that has climbed in value over the years generally make the most worthwhile donations to a CRT," says Parish.
You will receive an income-tax deduction for the donation based on the present value of the remainder interest, which the charity will receive in the future.
This present value is computed by using factors established in published government tables, and a floating interest rate as prescribed by the IRS.
For example, if at age 65, you contributed $200,000 worth of stock to a charitable remainder annuity trust (described below), which is to last for your lifetime, and the prescribed interest rate is 8%, you would be entitled to an income tax deduction of $69,824.
The asset is removed from your gross estate, thereby saving estate taxes.
"If your estate at death is not likely to exceed $600,000, which is when estate taxes kick in, then a CRT doesn't make as much sense," cautions Parish.
Charitable remainder trusts come in three basic types, according to Parish.
A charitable remainder annuity trust annually pays out a fixed dollar amount based on a fixed percentage of the initial value of the trust.
A $200,000 CRT at 5% a year will pay out $10,000 every year until the donor's death or the trust terminates.
A charitable remainder unitrust pays out a fixed percentage of income a year based on the value of the CRT each year.
In our above example, that would be $10,000 the first year, but $15,000 in year ten if the CRT's assets increase in value to $300,000.
A charitable pooled income fund is a remainder trust set up by the charity to which many donors contribute.
The amount of income received by each donor is based on the size of the donor's initial contribution and the rate of return the pooled assets earn.
After a predetermined time period, ownership of the contributed assets pass to the charity.
"Although charitable remainder trusts make economic as well as charitable sense, they aren't for everyone," points out Parish.
Beyond the fact that people with smaller estates don't receive as much in the way of tax benefits, donors must consider the wisdom of donating certain assets.
For example, donating greatly appreciated stock is a good way to avoid the capital-gains tax, but on the other hand, many financial planners recommend that retirees keep some stocks in their portfolio to offset inflation.
"It's always wise to examine your overall financial situation before taking a financial step as major as a CRT," says Parish.
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