Charitable Deduction

A gift of property or money to a qualified charity is fully deductible against the gift tax (if made by the donor during lifetime) or against the estate tax (if made after death). By themselves, each of these transfers will save up to 35 cents on each dollar contributed for gifts made in 2012 (35 percent being the maximum transfer tax) and 40 cents on each dollar contributed after 2012. If the charitable gift is made during lifetime, it also carries with it the advantage of being deductible against current income taxes. This could mean up to another 35 percent or 39.6 percent tax savings in 2013, because the top income tax rate is 39.6 percent--which makes this strategy even more beneficial.

If you are interested in benefiting a qualified charity, but need funds for the remainder of your life, or you'd like to benefit a charity, but leave your estate to your loved ones, then you should work with a qualified financial or estate planning individual to create the appropriate charitable trust.

Warning Selecting the right type of trust and establishing it so that it meets your objectives is a job for a professional. The slightest misstep can cost thousands of dollars in taxes and have outcomes that you did not expect and do not want! The information provided here is designed to help you become aware of the various options and to be prepared to ask the right questions from your professional. In addition to the information provided in these articles, most of the major charities and/or educational institutions have planned giving offices that often can provide information free of charge regarding various giving options.

There are two basis types of trusts—charitable remainder trusts and charitable lead trusts. Each of which accomplishes very different objectives and has very different overall tax consequences.

Charitable Remainder Trusts (CRT). If you're not inclined to make an outright gift to charity, either during lifetime or at death, you can save taxes by way of a charitable remainder trust. In a charitable remainder trust, you (or any beneficiary or beneficiaries that you designate in the trust document) receive income from a trust during your (or their) lifetimes, but when you die, what's left, the remainder, in the trust goes to the charity. The amount of income that you receive from the trust each year depends on how the trust is set up (drafted.)

• Charitable Remainder Annuity Trust (CRAT). With a CRAT, the beneficiary, or beneficiaries, get the same amount of income each year. This amount is established when the trust is created and it does not vary, regardless of what happens to the value of the assets in the trust or the economic conditions. The benefit is that you always know how much you are going to receive each year. However, the disadvantages are significant. If the assets in the trust (known as the "trust corpus") increases dramatically, then the charity will receive the ultimate benefit. If the value of the assets decreases, or if the rate of interest on investments drops, then the trust can be drained—leaving you with no income and the charity with no donation from the remainder.
• Charitable Remainder Unitrust (CRUT) Like a CRAT, the beneficiaries receive income from the trust as long as the grantor is alive; and the charity receives what's left over when the grantor dies. Unlike a CRAT, the annual income payments are not fixed at a set amount. Instead, the beneficiary (beneficiaries) receive a stated percentage of the trust's assets and the value of the assets is recalculated each year. This means that the beneficiary may receive a great deal of income in one year, but very little the next. However, it preserves the assets of the trust in lean economic times while ensuring that the charity doesn't reap an intended windfall in a boom economy.

If you followed all the rules, you'll get an estate tax charitable deduction for the value of the remainder interest (computed as the value of the property minus the value of the non-charitable beneficiary's interest.) Thus, if you fund the trust with assets worth $1 million, and the life estate interest is worth $600,000, your estate will get an estate tax deduction for $400,000 at your death, even though the charity may not get the property for years in the future.

Charitable Lead Trusts (CLT). In a charitable lead trust, the charity gets the income during the life of the grantor and the grantor's beneficiaries get the remainder interest upon his or her death. Just like the charitable remainder trusts, charitable lead trusts come in two flavors: charitable lead annuity trusts (CLAT) and charitable lead unitrust trusts (CLUT). CLATs offer significant income tax planning opportunities, as well as estate planning opportunities. For this reason, it is well worth a detailed discussion with a tax professional.

© 2024 Wolters Kluwer. All Rights Reserved.