Besides the intrinsic rewards of charitable giving, it may also have significant tax benefits, as charitable contributions may be deductible from income and estate taxes. Although a simple bequest through your will may be the simplest way to set up a charitable contribution, several other options exist that may provide a better fit for your specific estate planning needs.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is an irrevocable, trust that provides an income stream to you or a non-charitable beneficiary you select, with the remainder of the assets being gifted to your favorite charity. The trust provides you or the non-charitable beneficiary income over a specified time period, not to exceed 20 years, or for your or their lifetime. At the end of that period, the charity receives the remaining assets. A wide assortment of assets can fund the trust including cash, bonds, mutual funds, stocks and real estate.
A CRT offers the following benefits:
- Once an asset (such as stock) is gifted to the charity, the trustee can sell the asset with no gift, estate or capital gains tax consequences.
- The trustee can use the proceeds of the sale to set up an investment that will provide an income stream.
- You will be able to take a charitable income tax deduction based on the present value of the trust’s remainder interest.
Designing a CRT
A CRT takes the form of either an “annuity trust” or a “unitrust.” Both allow flexibility in payment options. The main difference involves income and fair market value of the assets in trust. Income from an annuity trust is a fixed percentage (not less than 5% or more than 50%) of the initial fair market value of the assets. This type of trust is best used with assets that will be able to generate the required income and do not fluctuate greatly in value (such as bonds).
A unitrust is more flexible but can be a riskier alternative. In a unitrust, you would still receive a fixed percentage (not less than 5% or more than 50%) of the value of the assets in the trust, but the assets are valued annually, and you receive the fixed percentage of the current fair market value. This allows you to benefit from any growth in the investment. The unitrust also enables more contributions to the trust, whereas the annuity trust does not.
Additional Options for Charitable Giving
Though a CRT may sound like the ideal choice for your charitable bequests and estate planning needs, there are several other options to consider.
- Charitable Lead Trust (CLT) – A charitable lead trust is essentially a CRT in reverse. Unlike a CRT, a CLT allows you to place in trust assets that will be left to your heirs. You specify a set number of years during which a guaranteed amount of a fixed percentage of the value of the assets in the trust will be paid to a charity. You pay discounted gift taxes on assets transferred to the trust and do not receive a charitable deduction. Your heirs ultimately will receive trust assets free of estate taxes.
- Foundations – Setting up a foundation enables systematic gifts to an area of special importance to you. Foundations can fund college scholarships, research grants and the maintenance of collections or real estate, among others. Some of the tax advantages that made foundations so popular in the first half of the 20th century have been eliminated, but foundations are still utilized to preserve and foster an individual’s or family’s philanthropic legacy.
To learn more about incorporating charitable giving into your estate plan, contact a Fifth Third Bank specialist.