We value the act of helping others; it’s part of our culture. We raise our children with those same beliefs and we give freely with no expectation of anything in return. It’s simply the American way. For those with considerable wealth, in order to continue giving, there must be protections put into place that will help ensure taxes don’t become a roadblock to their charitable intentions. There are many tax benefits of charitable trusts and a qualified estate planning lawyer should be your first call.
In many ways, the federal government does its best to get out of the way, so to speak, of our philanthropic efforts by providing basic tax benefits. But again, those with considerable assets often need more than just a basic benefit. The good news is there are many ways to accomplish this.
Charitable Remainder Trust
By creating a charitable remainder trust, assets, including cash, are paid out to our chosen charities at regular intervals. When those trusts are structured properly, it serves its purpose and the charity benefits from those protections.
These trusts offer several beneficial breaks. There’s the income tax deduction that you’re allowed to take on the “estimated present value”. It too will find its way to the charitable organization. Upon the grantor’s death, those assets aren’t subject to the sometimes-invasive estate tax laws. Because the grantor moved those assets away from his personal estate, those assets go to the charity, completely exempt from capital gains tax. There’s one exception: the tax exemption is applicable unless there are unrelated business income. The deduction, including the income distribution deduction, can be used to offset business taxed income.
Another commonly known advantage is that it easily converts appreciated and low yielding property into higher yielding property, minus the recognition of capital gain upon the sale.
The Charitable Lead Trust
In these trust designations, the option is made available for the charity to receive a consistent income for the life of the trust. Like its remainder trust contemporary, there are no estate taxes since the grantor has separated himself from those assets. Keep in mind, this is not tax-exempt unless it is a grantor-type lead trust it will receive an unlimited deduction used for distributions to the charitable beneficiary.
The charitable lead trust has many advantages, too. The tax value of the remainder of the trust property is fixed at the time of the gift, rather than at the death of the grantor, provided there is appreciating property as part of the trust. Also, the grantor may receive a substantial tax deduction the first year.
What They Have in Common
Both of these trust designations are irrevocable. Once the form is funded, there’s no going back, but again, these are popular because of the tax benefits. Most people wouldn’t consider this as an option if there were concerns about not being able to access the property or other assets.
In most instances, a charitable organization has no problems using the gifts, but there are those instances when it’s not possible. Again, your estate planning lawyer can help you navigate those waters so that you’re in the loop every step of the way.
Structured right, the charities you support will have no problems with putting to use the assets you leave behind. The added tax savings for you is a bonus.
Finally, don’t underestimate the role and insight your estate planning lawyer can provide. His experience in these situations allows him to recognize and then prevent future problems, especially considering the upfront costs and the administrative fees that are common in these types of trusts.