You don’t have to be Warren Buffett or Bill Gates to leave a legacy to a charity; and, you don’t have to forsake your heirs, either. Want to help support art, science, or education? Everyone has their own reason for gifting their assets or a portion of their income to charitable organizations. Some find comfort in helping others who are less fortunate, while others simply want to share their good fortune. Many of the institutions are supported in large part by those who want to give something back in appreciation for their contributions to the community or the individuals themselves.
Currently, the tax code offers incentives for gifting of one’s assets or incomes. Tax deductions are given for current contributions and, for estate owners, charitable gifts can reduce the size of the estate to help minimize estate taxes.
Usually, an individual will designate a charitable beneficiary in their will to benefit the organization after the individual dies. By using charitable gifting techniques, a donor may be able to benefit the charity while living without having to sacrifice the income that those assets can generate. Understanding how properly structured charitable gifts can provide current benefits for both the donor and the charity could be important for the charitably inclined.
Charitable Remainder Trust
A charitable remainder trust (CRT) enables the donor to transfer an asset while retaining the right to the income it generates. The asset itself becomes the “remainder” which is owned by the charity. Remainder trusts, if properly structured, can qualify for a current tax deduction. Not bad: The donor can donate, receive a tax deduction, and still live off the income the asset generates! There are three types of remainder trusts:
Unitrust: A charitable remainder unitrust (CRUT) is calculated so that the income the donor receives is based on a percentage of the current fair market valuation of a trust asset. Each year, as the asset is valued, the income is adjusted based on the new valuation. Of course, asset values can fluctuate, meaning the income can fluctuate, too.
Annuity Trust: Instead of a percentage of the asset value, the donor is paid a fixed amount annually from a charitable remainder annuity trust (CRAT). So, this one’s like an annuity. The income is fixed.
Pooled Income Fund: Donors can pool their donated assets in a fund that is operated by the charitable organization. The donors then receive a proportionate share of income from the fund that is paid throughout their lifetime. Payments can vary each year based on the valuation of the underlying assets in the fund.
Charitable Lead Trust
This operates as the reverse of a remainder trust. Also known as an Income Trust this vehicle transfers the income rights to the charitable organization. Generally, the income rights are assigned for a specified period of time after which the remainder passes to the donor.
Charitable planning involves tax issues that should be discussed with a qualified tax or financial professional.
For more information of charitable planning, please contact us today.