Charitable Remainder Trusts: You Win. Your Favorite Charity Wins. Uncle Sam Loses.
The charitable remainder trust is a powerful, yet little-known wealth management tool. It allows you to shield appreciate assets from capital gains taxes permanently, while taking an immediate income tax deduction based on their full appreciated value, and to avoid inheritance taxes, all while benefiting charity. Few other strategies can accomplish all of these goals at once.
How does it work? The creator of the trust, who is called the donor, transfers ownership of a collection of assets to a trustee, and names two sets of beneficiaries: income beneficiaries and remainder beneficiaries. The incom beneficiaries are typically the donor and/or one or more family members, although they can be anyone he or she chooses. The remainder beneficiaries are one or more charities chose by the donor.
The income beneficiaries draw income from the assets either for life, or for a set term of up to 20 years, much like an annuity. When they pass away, or the term of years ends, any remaining assets are donated to the specified charities, bypassing probate court and inheritance taxes.
Appreciated assets that are donated to the trust are exempt from capital gains taxes forever. Further, the donor may take an immediate income tax deduction that is based on the full appreciated value of the assets (the exact size is determined by a number of factors including the ages of the donor and beneficiaries). Further, profits earned by the assets held in trust are immune from capital gains taxes as well. Only the income paid out the income beneficiaries is taxed, and the tax rate varies depending on how it was generated.
Charitable Remainder Trusts are an attractive option for many investors who are nearing retirement age. In particular, any investor considering purchasing an annuity would do well to consider setting up a charitable remainder trust instead. It has the potential to generate the same level of income, with significant additional tax benefits, while benefiting one or more charities you are passionate about. Think of it this way: who would you rather receive the remainder of your hard-earned next egg when you pass away? An insurance company? The government? Or a collection of charities of your choosing?
Note: This article is general in nature, and does not constitute individualized legal, financial, or tax advice. Be sure to consult qualified professionals before choosing this or any other financial strategy.