In our last post, we discussed how those looking to leave a not insubstantial amount to a favorite cause or charitable organization should consider executing what is known as a charitable trust, an estate planning mechanism that can help them both accomplish their objectives and realize substantial tax savings.
We’ll continue this discussion in today’s post, exploring some of the major tax benefits provided by charitable remainder trusts.
What’s one of the primary tax benefits of a charitable trust?
One of the primary — and perhaps most obvious — tax benefits provided by a charitable trust is that it will serve to reduce the size of the trustor’s estate and, by extension, the size of the estate tax that must be paid. That’s because the terms of the trust dictate that the entirety of its assets must go directly to the charity upon the death of trustor.
What are some of the other the other major tax benefits?
After establishing and funding the charitable trust, the trustor is permitted to utilize an income tax deduction for the value of their donation over a five-year period.
Is this a dollar-for-dollar deduction?
No, this is not a dollar-for-dollar deduction. Internal Revenue Service rules dictate that the total deduction is the amount originally donated to the trust minus the portion of the income generated by these funds that the trustor expects to receive over a lifetime.
By way of example, consider a scenario in which you formed and funded a charitable trust with $400,000 and are expecting to get back $200,000 in interest payments for the duration of your life. Here, you would be able to deduct $200,000.
What about property and charitable trusts?
Those who create fund a charitable trust with property that is not producing income can realize a profit without paying any tax.
Consider an example whereby you own 2,000 shares of stock that have jumped in value from $50 per share to $100 per share. If you were to sell the stock on your own, you would have to pay capital gains tax. However, if you were to donate the $200,000 of stocks to a charitable trust, the chosen charity, acting in its role as trustee, could sell the stock, invest the money, and proceed to pay you interest from these proceeds thereafter — all without paying capital gains tax.
We’ll continue this discussion in our next post, examining the types of income that may be paid from a charitable trust — percentage payments and annuity payments.
Please consider sitting down with a skilled legal professional if you have questions regarding the formation of a charitable trust — or any other type of trust.