Maximizing Your Impact Through Charitable Trusts

Embrace Philanthropy and Tax Efficiency With Charitable Trusts

Charitable trusts represent a powerful tool for those who desire to make significant charitable contributions while also obtaining considerable tax benefits. As a dedicated supporter of philanthropy, consider establishing a charitable trust to enhance the efficacy of your generosity. However, small, occasional donations to charity may be more straightforward without the formality of a trust.

Prior to forming a charitable trust, it’s crucial to acknowledge the gravity of this decision. Charitable trusts are irrevocable instruments; once established and activated, you relinquish the legal authority over the assets placed within the trust.

The Mechanics of Charitable Trusts

The charitable remainder trust is an established and popular form of charitable trust. To understand its function, consider the following steps:

Initially, you create the trust and transfer your chosen assets into it. The IRS must recognize the recipient charity, generally evidenced by their tax-exempt status.

The charity assumes the role of trustee, overseeing the assets and generating income. Payments from this income are dispensed to you or to a designated individual for a predetermined time frame or for the remainder of your life, as detailed in the trust agreement. Subsequently, upon your demise or after the designated term, the remaining assets are bequeathed to the charity.

Tax Benefits Available to You

The establishment of a charitable trust is not purely altruistic; it is accompanied by a suite of tax advantages.

Income Tax Relief

You may be eligible for an income tax deduction, apportioned over five years, for the donation made to the charity. Calculating your deduction involves several considerations, including the potential income derived from the donated assets.

Estate Tax Exclusion

Upon the culmination of your life or the stipulated payment period, the trust assets that transfer to charity do not form part of your estate, thus evading federal estate tax.

Avoidance of Capital Gains Tax

Gifting appreciating assets to a charitable trust permits the transition into cash without incurring capital gains tax—a tax that would be applied if the assets were sold independently.

Example:

Toni donates appreciated stock to a charitable trust in favor of Greenpeace. Greenpeace, free from capital gains tax obligation, sells the stock and invests in income-generating ventures. Toni receives proceeds for life, bypassing the capital gains tax she would have faced had she sold the stocks herself.

Receiving Trust Income

Your payments from the charitable remainder trust can be formatted in one of two ways:

Guaranteed Annuity

A pre-determined, unalterable annual amount can secure stable income, irrespective of the trust’s fluctuating earnings.

Percentage-Based Distributions

Alternatively, payments can be set as a fixed percentage of the trust’s annually appraised value, allowing for income adjustment with asset value variations.

Example:

Felix benefits from creating a charitable remainder trust with his alma mater. Felix circumvents capital gains tax while obtaining income tax deductions and guaranteeing himself a percentage of the trust’s value as annual income.

For comprehensive guidance on establishing your charitable trust and maximizing your philanthropic efforts, Goldberg & Goldberg offers a wealth of experience. Engage with us for a Free Consultation by calling (301) 654-5757. Begin your journey toward impactful giving and favorable tax planning today.