When people establish a charitable trust, they are doing more than just helping their favorite charities. Charitable trusts offer wealth management benefits to help you fulfill your philanthropic goals.
These trusts are financially savvy ways to give back and create an income stream for you or your heirs. They allow you to bypass Capital Gains tax on highly appreciated assets like business interests, real estate, stock, Bitcoin, etc.
With the current tax code, it is essential to consider how charitable giving can factor into your overall estate planning strategy. Charitable trusts are often a valuable tool in this regard. They offer several tax benefits, depending on the type of trust you establish and your unique circumstances.
One of the most significant benefits is a substantial federal income tax deduction, which can be as much as 37% of the value of the assets in the trust. Since trust income taxes can be substantially higher than individual taxes, this can make a big difference for donors.
Another significant benefit is the avoidance of capital gains taxes. If the trust holds long-term appreciated assets, such as stocks or real estate, you can bypass capital gains taxes when the trust sells those assets. This can be especially useful for individuals in the higher tax brackets.
A split-interest trust is a type of charitable remainder trust (CRT). It allows you to receive an income stream for life, and at the end of that term, the remaining assets will be distributed to the charity or charities you have designated. This trust structure is often used for highly appreciated assets that would otherwise be subject to capital gains tax upon sale if sold by the donor directly. In addition, a non-grantor CRT can be used when immediate tax deductions are not an objective.
A charitable trust is ideal for fulfilling philanthropic goals while gaining financial benefits. This trust option offers tax incentives and a variety of options that may be tailored to your specific needs and objectives. Working with an experienced estate planning and wealth management professional before pursuing this strategy is essential.
You can choose the amount of money you receive from the trust each year and how much you want to give to charity in the future. You can also change these decisions at any time. Consider establishing a donor-advised fund (DAF) if you are considering a charitable trust. This strategy allows you to have greater flexibility in directing payments from your charitable trust to charities of your choice by changing the beneficiary of the donor-advised fund and directing those payments to the trust as the ultimate destination.
Depending on the type of trust you set up, you can avoid capital gains tax when contributing appreciated assets into the trust. This option is desirable for those with long-term held real estate or stocks subject to significant capital gains taxes when sold. The in-kind donation of these assets to the CRT allows you to take a partial income tax charitable deduction based on the estimated value of the remainder distribution to the charity.
Charitable trusts offer a way to support the causes you care about while also helping to preserve your family’s financial security. You can receive several unique benefits depending on the charitable trust you create.
For example, if you establish a charitable lead trust (CLT), your favorite charities will receive a portion of the trust’s assets or income for a specific period. This allows you to witness the philanthropic impact of your gift during your lifetime and can help you meet your overall charitable goals.
At the same time, a CLT can reduce or eliminate estate and capital gains taxes for your family and beneficiaries. You can contribute various assets to this type of trust, including cash, artwork, collectibles, crops, property, private or public stock, and virtual currency like Bitcoin. You can even set up a split-interest trust and receive an immediate tax deduction while retaining the ability to benefit from an income stream.
If you are interested in a charitable trust, work with a professional to decide the amount of assets you wish to move into the trust and determine the payout strategy. You may choose a percentage of the trust’s value or a fixed amount, such as 5% each year. If you opt for the percentage method, remember that your payments will go up or down depending on the trust’s investments.
Charitable trusts can funnel wealth quickly and efficiently into the hands of a charity you care about. They can be created during your lifetime or after death. They can include business shares, cash, art, valuables, crops, livestock, IRA funds, private or public stock, and real estate.
If you contribute highly appreciated assets to a charitable trust, they will avoid capital gains tax. This allows you to realize a more significant income stream and potentially increase the amount of help you can donate.
It also allows you to preserve the value of non-income-producing property. For example, if you own a multifamily home, you can transfer the deed to a CRT, enabling you to rent out the units and retain ownership of the property, which will grow in value over time without incurring any capital gains taxes.
Depending on how it is structured, a charitable trust can help you achieve both your philanthropic and wealth management goals. While there are many tax and wealth benefits to consider, carefully weigh the benefits against your unique circumstances. For this reason, it is best to work with an experienced financial professional to discuss how a charitable trust can benefit you and your family. Ultimately, it can be a powerful tool to help you leave behind an everlasting legacy of goodwill.