After Lifetime Gifts

Charitable Remainder Trust

In certain circumstances a charitable remainder trust can achieve many of a person's financial goals at the same time, including increasing your income, reducing your taxes, and making a gift to charity. These trusts are typically created when a person has an asset he or she wishes to sell that has a sizable amount of taxable gain. For example, if you bought stock or real estate many years ago that has gone up significantly in price but which you would like to sell, you might consider this strategy.

You would first have your attorney create a charitable remainder trust. You would then put the asset into that trust. The trust would sell the asset, paying no capital gains taxes on the sale.

You would, however, receive an income tax deduction for putting the asset into the trust. Each year the trust would provide you with income. This income could be either a certain dollar figure per year (a charitable remainder annuity trust) or a certain percentage of the trust assets (a charitable remainder unitrust), such as 5% or 7%. People who want the security of a fixed income usually choose an annuity trust. Younger people who want to benefit from the expected long-term appreciation of the value of the trust usually choose a unitrust.

Alternatively, you could choose one of the more elaborate payout options that would defer income from the trust. Whichever payout option you choose, you would receive this income for the remainder of your life (and if you choose the life of your spouse), after which the remaining money would go to charity.

An example will illustrate how a charitable remainder trust might help you.

Say for example you have owned some investment real estate for many years. You purchased it for $50,000, and it is now worth $500,000. After taxes and upkeep you are only getting a 3% return, or $15,000 a year in income. You would like to sell the property to reinvest in something that gives you more income, but at a 20% rate for capital gains taxes you will have to pay $90,000 in taxes if you sell it. Therefore, you create a charitable remainder trust that sells the property and reinvests the money. You create an annuity trust that pays out $35,000 a year for the remainder of your life (plus you receive a substantial income tax deduction based on your age and the amount of income you are receiving). You have thereby increased your income by $20,000 a year.

Had you invested the after-tax proceeds from the sale of your property, which would have been $410,000, you would have needed to generate over 8.5% a year in income to equal what you are getting from the charitable remainder trust, plus you received the original tax deduction for starting the trust and you are able to make a donation of the remainder of the trust to charity when you pass away.

In addition to real estate, charitable remainder trusts are often used when a person has an investment portfolio with capital gains. When considering this strategy it is important to have the trust sell the asset, since the trust will not be subject to capital gains taxes. If you sell the asset before putting it in the trust you will become liable for the capital gains taxes.

In some cases it is possible to make this type of gift and simultaneously provide a bequest to family members. Sometimes people will take the tax savings and, if needed, some of the income they get from the trust and purchase a life insurance policy on themselves with their children as beneficiaries. This allows a person to leave the remainder of the trust assets to charity and replace the value of that asset to children through the life insurance proceeds.

Please note: The information on this site is not intended as legal, tax or investment advice. For such advice, please consult a professional advisor of your choice.

Video on Amma

Gujarat Video

AIMS Video