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Who should consider a charitable remainder trust?


Richard Meyer

“Creating a charitable remainder trust is a great economical deal; the government tax laws are encouraging us to do this.”
–Richard Meyer



Donors who want income for life, bypass of capital gains tax on stock or real estate, reduced taxes, and the satisfaction of providing for a good cause such as IONS should consider a charitable remains trust.

For a relaxed tour of these powerful estate-planning and philanthropic tools, see the three videos below.

First, a few words about charitable trusts in general. Anything you place in a charitable trust—cash, stock, real estate—is invested by the trustee to pay you income for the rest of your life—and if you wish, to pay your heirs for life or a term of years. After the death of all income beneficiaries, what remains in the trust passes to IONS.

Your trust may provide you with some important tax benefits:

(1) An immediate income tax deduction for a percentage of your gift. We will be happy to give you an idea of the size of your deduction. We simply need to know the ages of the income beneficiary(ies) and the payout rate of the trust.

(2) No tax on the sale of appreciated property. From the donor's point of view, this is often the most important tax benefit. Sometimes thousands of dollars that would have gone to capital gains taxes remain in the trust, generating income to the income beneficiaries.

(3) The trust principal is not subject to estate tax. Property that might otherwise be subject to federal estate tax, which can be has high as 45 percent, is exempt from estate tax entirely.

Appreciated real estate is often an excellent asset to place in a charitable trust. Mature investment properties are frequently earning only 2, 3, or 4 percent of their fair market value per year. When these properties are sold and the proceeds reinvested by the trust, earnings often increase significantly.

Under ordinary circumstances, owners face substantial capital gains taxes when they sell rental properties or commercial real estate. In some cases, personal residences are also subject to capital gains taxes, even after the $500,000 exemption has been used. In any case, because your charitable trust will be selling the property, no capital gains taxes are due when the real estate is sold. Thus, the entire net proceeds from the sale can be reinvested to produce more income for you.

Gifts of appreciated stock are ideal for funding a charitable remainder trust because the stock can be reinvested by the trust for greater income while bypassing capital gains taxes at the time of the sale.

Some people find it useful to give an undivided percentage interest of real estate to a charitable trust rather than all of it. For example, a donor contributed 75 percent of a vacant lot into a charitable trust. When the lot was sold, $70,000 went directly to the donor from the sale, while $210,000 remained in the trust. Some of the $70,000 was taxable, but the donor used the income tax deduction generated by the gift to the trust to offset the tax due on the gain built into the $70,000 received.

There are two basic types of charitable remainder trusts. An annuity trust will pay you a fixed dollar amount for the rest of your life. A unitrust will pay you a fixed percentage of the trust principal each year, so if the value of the trust principal increases over time, your income increases with it. By law, your trust must pay you at least 5 percent of the principal. You may choose a higher payout rate, but the higher the payout rate, the lower your income tax charitable contribution deduction. Also, selecting the highest rate possible may not work in your best interest for another reason: If trust principal declines under the strain of meeting the higher rate, your income will decline with it. On the other hand, a lower payout rate may allow the principal to grow, and your income will grow with it. While additions can be made to a unitrust at any time, you can contribute to an annuity trust only once.

Finally, your trust must have a trustee. If you have an individual trust tailored to your circumstances, the trustee can be a commercial institution such as a bank or trust company, an individual with professional experience in trust management, a relative, or even yourself. There are some complications in acting as trustee yourself, but it can be done if you understand and comply with IRS regulations. IONS is happy to supply you with a list of possible trustees as well as information on being your own trustee.

The basic advantages of charitable trusts are not difficult to understand:

  • diversification of your assets without incurring capital gains taxes
  • lifetime income
  • immediate income tax benefits
  • reduction of estate tax
  • the satisfaction of providing for a good cause

There are even ways these trusts can benefit your heirs, which we have not covered. But the first thing to do is to find out if a charitable trust makes sense for you.

IONS will provide you with tax and income calculations tailored to your particular situation. This will give you and your advisors the information needed to make a considered decision as to whether a charitable trust meets your financial and philanthropic objectives. All information is provided confidentially and without cost or obligation. IONS deeply appreciates your willingness to help continue its work

For a personalized analysis, contact Christopher Minnes at 707-779-8216 or cminnes@noetic.org.


Videos

These three videos, created by IONS planned giving specialist Phil Murphy, explain how you can sell appreciated real estate and stock free of capital gains tax, increase your income, gain an immediate income tax deduction, and help IONS.

Doing Well Doing Good I

You can sell appreciated real estate and stock while avoiding capital gains tax, increasing your income, earning an immediate income tax deduction, and helping good causes. This video explains how.

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Doing Well Doing Good II

Charitable remainder trusts have an inner logic that makes them easier to understand: This Video asks four simple questions that will help you understand how you can gain important tax and income benefits immediately through a gift that pays you.

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Doing Well Doing Good III

How a woman parlayed a vacant lot into extra income for life, a married couple sold rental property tax-free and increased their lifetime income, and another couple created cash flow for themselves and later for their children through a tax-free sale of their apartment house.

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