There is nothing more rewarding than charitable giving. Clearly, you gain personal satisfaction when you are in a position to help worthy causes and institutions that are meaningful to you. At the same time, you may be able to gain tax advantages when you indulge your philanthropic urges. A charitable trust of some kind could be part of the plan.
Let’s look at some of the different types of charitable trusts that are used in the field of estate planning.
Charitable Remainder Trusts
A charitable remainder trust can be a good choice if you would like to gain tax efficiency as you simultaneously set aside resources for a charitable organization. The benefits are optimized if you fund the trust with assets that have appreciated considerably.
As the grantor of the trust, you could act as the non-charitable beneficiary. You also name a charitable beneficiary who would assume ownership of a percentage of the trust after the expiration of its term.
With a charitable remainder unitrust, you receive annuity payments from the trust that can range from five percent to 50 percent of the trust’s value annually. At the conclusion of the trust term, the charitable beneficiary must receive no less than 10 percent of the fair market value of the assets that were conveyed into trust.
The trust could sell the appreciated assets without any immediate capital gains consequences. Subsequently, the resources could be reinvested, and this would be an extraordinarily tax efficient arrangement. Capital gains taxes would be applicable on the annuity distributions, but the taxation would be spread out, and the earning power would be maximized.
Plus, you would be entitled to a charitable deduction when you convey assets into the trust, and you would be removing these assets from your estate for estate tax purposes.
Charitable Lead Trusts
There is another type of charitable trust called a charitable lead trust. To provide a simple explanation, the trust would be created to provide for a charitable beneficiary over a period of time. You would name a non-charitable beneficiary who would assume ownership of any remainder that may be left in the trust after its term expires.
The IRS would place a value on the gift, accounting for interest through the utilization of the hurdle rate, which is 120 percent of the federal midterm rate. You could arrange for the trust to receive the entirety of this amount, and it could be transferred tax-free, because qualified charitable organizations are exempt.
Theoretically, there would be nothing left in the trust after the expiration of the term. However, if the assets outperform the IRS estimate, there would be a remainder. The non-charitable beneficiary would inherit this remainder free of taxation.
If you are interested in creating a charitable trust, contact us at your convenience to set up a free consultation: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.