Reduce Taxes With Charitable Trust
If you're interested in leaving your assets to a charity, you may want to consider a charitable trust. In some circumstances, charitable trusts can be more beneficial to a charity than simply writing a check, and they may allow you to benefit financially as well.
Along with the fact that trusts may make you eligible for tax deductions and can potentially decrease the size of your estate, these trusts may be able reduce the tax implications for your heirs. Further, charitable trusts may allow you to avoid capital gains taxes and obtain income from non-income producing assets while allowing you to make a contribution to a non-profit organization.
What Are Charitable Trusts?
Charitable trusts are trusts that allow you to designate assets, which are usually liquid, to a charity of your choice. For the trust to be considered a charitable trust by the IRS, the organization you are setting up the trust for is normally required to have a tax-exempt status.
A charitable trust has to be managed by an individual, so there are normally fees associated with setting up and running one. What you'll need to pay will be based on a number of variables, but many managers charge on the percentage scale and usually require an additional separate fixed fee.
If you are interested in setting up a charitable trust, you can either select a Charitable Lead Trust or a Charitable Remainder Trust. Both can provide financial incentives for you along with providing assets to a charity of your choice. However, the way that they do so is different.
With a Charitable Lead Trust, you will be providing a charity with the interest earned from assets in the trust for a set period of time, and after this time has elapsed, the remainder of the assets are returned to you or transferred to a named beneficiary. The time frame is usually between 10 and 20 years, but some people set up the trust to terminate upon their death.
A Charitable Remainder Trust works in a way that is the opposite of a Charitable Lead Trust. These trusts provide an income for the donor, and at the end of the term, the remaining assets are gifted to the charity.
Tax Benefits of Charitable Trusts
There are a number of ways that creating a charitable trust can reduce the taxes that you, your heirs or your estate will be obligated to pay. The benefits that you will receive from a trust will depend on the type you choose, your assets and how the trust is set up, but you may be able to take advantage of several tax breaks.
- Tax Deductions
One benefit that may be available to you is a tax deduction that is spread out over five years and is based on the value of your gift to a charity. However, it's important to note that you can't necessarily claim the full value of your gift. The IRS will deduct the amount of income that you are expected to receive from the trust. Therefore, if you donate $200,000 to a charity but are paid $25,000 as a result of the way the trust is set up, you would only be able to deduct $175,000.
- Capital Gains Taxes
If you have assets that have appreciated in value but want to sell them because they are producing low yields, you might want to consider gifting them to a charity via a trust. This is because another advantage of a charitable trust is that the trustee is able to sell assets that are under the umbrella of the trust without having to pay capital gains taxes on them.
Once the assets are held by the trust, a trustee could sell them and purchase a property or asset that does produce income, and this income can then either be passed on to you or your charity. Depending on the value of the assets in question, this could mean avoiding tens of thousands of dollars or more in taxes.
This can be particularly beneficial to a charity because you can provide the full value of an asset to a charity via a trust. If you were to sell an asset and then write a check to the trust, unless you were willing to make up the difference, you would be reducing your gift by whatever amount of money you paid in capital gains taxes.
- Estate Taxes
If you have set up a Charitable Remainder Trust, you'll be able to deduct the value of the assets in the trust from your estate. Even if your estate is under the federal estate tax exemption limit, states often have much lower exemption thresholds, and reducing the final size of your estate can have a significant impact on tax obligations.
Income From Charitable Trusts
In addition giving money to a charitable organization and reducing what you owe the government, Charitable Remainder Trusts can also allow you to receive income. You have the option of choosing a fixed annuity or receiving a percentage of trust assets.
A fixed annuity allows you to name a certain dollar amount that you will receive from the trust each year. Once the annuity is set, you can't change it. Therefore, while you may have an assured income, you also cannot reduce or increase the amount you are paid out.
The other option is to receive a percentage of trust assets. This ensures that you won't deplete your trust when it is doing poorly, and you can benefit when it does well, but you can't rely on a fixed income.
While charitable trusts have a number of benefits to offer you, it's important to note that they are designed for people looking to gift a significant sum of money. Additionally, they are irrevocable. Speaking with an experienced attorney can help you decide if a charitable trust is right for you, and an attorney can help to ensure that it is set up for the maximum benefit of all involved.