May 27, 2016

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Charitable Remainder Trusts: A Viable Strategy for Building Wealth, Maximizing Tax Deductions, and Supporting a Beloved Charity

While most of us think of charitable giving around the holidays (or around tax time!), for many it is prudent to plan your giving to receive all of the benefits that are available to you.  Planned giving comes in many forms depending on your overall goals and the size of your estate.  One viable planned giving strategy is a Charitable Remainder Trust.

How It Helps
Individuals or couples who are considering making charitable donations at the end of the year should consider creating a Charitable Remainder Trust. This specialized trust is approved by the IRS and can help accomplish three goals:

  1. provide financial benefits to designated beneficiaries over a period of time;
  2. maximize tax deductions; and
  3. enable the donor to transfer a remaining portion of the contributed property to a favorite charity. 

How It Works
After the trust is established and fully funded, the trustee of the trust makes distributions to the individual beneficiaries in the form of a fixed annuity, or of a percentage of the current fair market value of the trust’s net assets, over a period of time, or term, with the assets remaining at the end of the term being donated to a designated charity or charities.  The income tax charitable deductions are based on the present fair market value of the assets that will eventually be donated to charity, reduced by the present value of the payments that will be made to individual beneficiaries over the term of the trust. 

Additional limitations to income tax deductions may apply depending on the charity and the type of property contributed.  For example, while donors are generally entitled to deduct the full fair market value of appreciated long-term capital gain property contributed to a trust (subject to a deductibility ceiling and a 5-year carryforward rule), many donors are limited to a charitable deduction equal to their own basis in appreciated ordinary income property that is donated. 

A Practical Example of This Trust
Rachel creates and funds a Charitable Remainder Trust on October 1, 2015, and transfers to the trust appreciated property that has a fair market value of $100,000. The trust provides for an annuity payment to Rachel in the amount of $5,000 on September 31 of each year for the next 15 years.  Based on IRS regulations, the present value of the annuity interest is $60,562, and the charitable remainder value is $39,438.  Rachel chooses to give the remainder interest to a public charity. 

As a result, the trust (i) provides Rachel with a 15-year annuity, (ii) avoids the recognition of gain on the transfer of the property, and (iii) obtains a charitable income tax deduction equal to the full fair market value of the charitable remainder interest ($39,438), subject to a deductibility ceiling of 30 percent of Rachel’s adjusted gross income.  Rachel is also entitled to a 5-year carryforward for any unused portion of her charitable deduction.

Next Steps
Effective planning with your attorney concerning complex IRS rules and regulations is essential to maximize the benefits of this planning tool.  If you are interested in learning more about the benefits of Charitable Remainder Trusts or how charitable planning can work together with your existing estate plan, please contact the authors.