It’s that time of year again… the hustle and bustle of the holidays are upon us! If you are like me, you may still be searching for that perfect gift for everyone on your list. Perhaps this year, as you make your list and check it twice, you may want to consider a charitable remainder trust.
A charitable remainder trust is an irrevocable trust that allows the donor, or anyone else you name, to receive each year either a fixed dollar amount from the trust or a percentage (at least 5%) of the value of the trust. The right to receive this distribution is either for the individual’s lifetime or for a period of years not to exceed 20 years. At the end of the term, the amount remaining in the trust is distributed to a qualified charity. Generally, a qualified charity is one that has been deemed tax-exempt by the Internal Revenue Service.
Moreover, the charity will serve as trustee of the trust and will be responsible for investing and managing the asset(s) to produce income for you. Because the charity is also the remainder beneficiary, it has an incentive to increase the value of the trust, which in turn, benefits not only the charity, but you as the income beneficiary of the trust.
In addition to the income benefit, there are three primary tax benefits. First, after you have transferred the asset(s) to the trust, you may take an income tax deduction, spread over five years. You are not, however, allowed to deduct dollar for dollar the amount that you gave. Rather, you are only allowed to deduct the amount of the “gift,” which is the amount donated less the amount of income you are expected to receive. Second, whatever the charity receives at the end of the trust term, is not subject to estate tax. Similarly, the donation will not be subject to gift tax based on the amount the “gift,” unless the income beneficiary of the trust is someone other than the donor or their spouse, in which case, there may be a gift tax imposed on the amount of income that is paid to the income beneficiary. Lastly, because the charity is tax-exempt, there is no capital gains tax on the sale of the asset(s) in the trust. So, you can turn non-income-producing property that has increased significantly in value from the time at which you acquired it, into cash without having to pay capital gains tax on the profit. This enables you to invest the full proceeds of the sale into an income-producing asset.
Further, you can elect to have either fixed annuity payments or a percentage of the current value of the trust. If you choose the fixed annuity, you will receive a fixed dollar amount each year. This is beneficial if the trust has a lower than expected income return because you will still receive your fixed payment. Sounds great, but be careful. The higher your annuity is, the lower your income tax deduction. Also, if the trust does not generate enough income to cover your annuity payment, then the trust’s principal will be used. The more principal that is used, the less likely it is that the charity would receive anything at the end of the trust term and consequently, the less likely it is that the charity would accept your donation in the first place.
Conversely, if you elect a percentage of the value of the trust, your payments will reflect any gains or losses in value of the investments each year. And, it is important to note, that once a decision is made, you cannot change it later. If you are considering a charitable remainder trust, call ERA Law Group, LLC at (410) 919-1790 before making a final decision. Happy gift giving!