Last month, we began discussing how even though people might harbor doubts about ever being able to give more than a nominal amount to a favorite charity at the outset of their careers, they may ultimately find themselves in a position to do exactly this after 30-40 years in the working world.
We also discussed how one of the preferred methods of doing this might be through a charitable remainder trust, which, to recap, is an estate planning instrument that facilitates gifts to charity while also providing the trustor — i.e., trust creator — with considerable tax benefits. We’ll examine these tax benefits in today’s post.
Charitable trusts: tax advantages
According to legal professionals, the tax advantages of charitable remainder trusts are essentially threefold.
Once a charitable remainder trust has been established and funded, the IRS permits the trustor to take an income tax deduction for the value of the charitable gift spread out over five years.
It’s important to understand, however, that the income tax deduction is not dollar-for-dollar, but rather the amount the IRS determines that the trustor can expect to receive via interest payments over the five-year time frame.
As we stated in our previous post on this subject, when the trustor passes away, whatever assets remain in the charitable remainder trust will go to the charity that has served as trustee. What this means is that this property will not be included in their estate, such that the estate tax bill will be lower.
Capital gains tax
By establishing a charitable remainder trust, an individual can transform non-income generating property into cash without having to pay capital gains tax on the profits realized.
By way of example, consider a scenario in which a person donates 1000 shares of stock that have appreciated in value from $10 per share to $100 per share to their charitable remainder trust. Here, the charitable trustee can sell the stock, invest it in some manner of mutual fund and pay the trustor interest from the fund without having him or her having to pay capital gains tax.
If the trustor had decided to simply sell the $100,000 of stock, there is no way this could have been avoided.
We’ll conclude this discussion in a future post, focusing on the types of income that can be paid by a charitable remainder trust.
Consider speaking with an experienced legal professional if you would like to learn more about establishing a charitable remainder trust or creating a comprehensive estate plan.