Receive While You’re Giving – The Charitable Remainder Trust

Having watched Dickens’ “A Christmas Carol” this past Sunday, I am reminded that Christmas time is the “Season of Giving”. Not just presents for the family, but assistance to those less fortunate. For as Scrooge’s partner, Jacob Marley, observed:

“Mankind was my business. The common welfare was my business; charity, mercy, forbearance, benevolence, were all my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business!”

While we are called to help those in need, it doesn’t hurt to take stock of your overall objectives as we head into the new year and make smart moves to maximize wealth preservation along with charitable giving. One way to accomplish both objectives is through the establishment of a Charitable Remainder Trust or CRT. By making your contributions through a CRT, both you and the charity can benefit from the assets you give away.

How the Charitable Remainder Trust Works

Instead of writing a check directly to your favorite charity, you make a gift to a tax-exempt CRT naming either that specific charity or a specific cause as the beneficiary. The CRT is set up for your lifetime, or a period of time not to exceed 20 years, before the charity receives the balance of the assets in the trust. Up until that time, you or a named designee will receive an income stream generated from the trust.

When an asset is transferred to a CRT, there are no capital gains taxes on the appreciation of that asset. If the trust in turn sells the asset, there are no taxes due at that time either as the trust itself is tax-exempt.

There are different versions of the CRT and the income stream you receive is based on the structure of the CRT you establish. A Charitable Remainder Unitrust (CRUT) will provide income that is a stated percentage of the annual value of the assets in the trust. So the percentage paid out every year is fixed, but as the value of the trust varies with investment results, the actual dollar amount can vary. If you establish a Charitable Remainder Annuity Trust (CRAT), the income paid will be the same fixed-dollar amount every year. In either case, any income paid to you will be taxable although you may receive a charitable income tax deduction when you make the asset transfer to the trust.

The Insurance Angle

In addition to the potential of a charitable income tax deduction at the time of your donation, the asset you give away to charity can in many cases be replaced for your heirs through the use of a Wealth Replacement Trust (WRT) funded with a life insurance policy.

For example, a friend of mine worked for Intel starting in the very early 1980’s. According to Yahoo Finance the price of Intel’s stock on January 3, 1983 adjusted for splits and dividend payments was $.32 per share and yesterday the stock closed at a price of $34.91, again adjusted for splits and dividends. While I don’t know how many shares my friend owns in total, he has hinted at pricing 50 foot yachts to retire on so we can assume he owns more than 100 shares.

Let’s assume that he and his wife decide to donate $500,000 in the form of Intel stock to their favorite charity. They can establish a Charitable Remainder Annuity Trust (CRAT) taking a charitable income deduction based upon their personal financial situation* and naming their charity as the beneficiary of the trust balance. By establishing the CRAT, the trust can sell the Intel stock for them without incurring taxation on the very sizable gains and they can receive income payments from the trust for their joint lifetimes.

In addition, my friend could also establish a Wealth Replacement Trust funded with a $500,000 policy on their joint lives to replace the value of the donated stock for their kids at their death. They can use a portion of the income they receive from the CRAT to pay the premium on the policy and use the rest as spendable income.

The world today is very unpredictable and this causes us to hesitate to do some of those things we would like to do, such as making a big charitable donation, for fear of the Ghost of Christmas Yet to Come. Working with a knowledgeable advisor who understands both your wishes as well as your fears might bring some clarity to the situation and allow you to take that big step toward helping others.

God Bless us, everyone!

*Tax laws not only change on a continuing basis but also vary from state to state, please have any personal illustration reviewed by a tax professional before executing any documents.

This post does not constitute tax, legal or accounting advice and neither Summit Investment Management, Ltd, it’s agents, employees or registered representatives are in the business of offering such advice. It was written to illustrate a possible alternative to more traditional forms of giving mainly direct donation of the appreciated asset or sale of the asset and direct donation of the ensuing proceeds. Trusts should always be drafted by an attorney familiar with such matters in order to take into account income and estate laws that could adversely impact tax treatment of trust proceeds.

Post from: Insights