Does your estate plan include donations to not-for-profit organizations who you feel are worthy of your generosity? If so, consider adding a charitable remainder trust to your estate plan. Charitable remainder trusts allow you to enjoy the impact of your largesse while you are alive—and offer excellent tax benefits as well.
Kiplinger’s article “Are You Losing Big Tax Savings on Your Charitable Bequests?” says you shouldn’t be too concerned that this approach might leave you short on funds for living expenses now. Transfer the money you’re planning to leave to charity at death to a charitable remainder trust now. With a charitable remainder trust, you’ll retain an income from the trust and whatever principal is left when you pass away goes to the charities designated in the trust.
Any income would be a fixed percentage of the initial contribution to the trust (a “charitable remainder annuity trust” or “CRAT”) or a fixed percentage of the value of the trust as of December 31st of the last year (a “charitable remainder unitrust” or “CRUT”).
The nice thing about using a CRAT is that you’ll know the amount of the income each year. Contrast that with a CRUT, where you would have the opportunity for the income to grow if the assets of the trust experience growth in excess of the payment. If the return on the assets isn’t great enough, however, you could deplete the assets of the trust with a CRAT because your income isn’t dependent on the amount of assets in the trust. You’d have that same issue if you didn’t put the assets in the trust but continued to take the same income—an income amount not supported by the investment return.
A CRUT sets your income as a percentage of the value of the account each year. If the account decreases, your income the following year would be adjusted accordingly by the normal operation of the trust. As a result, the income wouldn’t deplete the trust, but it might get pretty small at some point with continual investment underperformance.
To ensure that you enjoy the full tax deduction, which—depending on your income—might be spread out over as many as six years, speak with an experienced estate planning attorney familiar with the use of charitable trusts. He or she will be able to help you analyze the impact of the charitable trust on your overall tax situation, determine your comfort level with the amount of the trust and work with the not-for-profit’s development office to ensure your donation is applied correctly.
Charitable planning can be an effective estate planning tool to minimize taxes on an estate or even provide income, but it’s best to work with an experienced estate planning attorney on these more advanced estate planning techniques. For more information, explore our website and contact us to schedule your consultation today!
Reference: Kiplinger’s (June 2016) “Are You Losing Big Tax Savings on Your Charitable Bequests?”