Many people choose to set up a charitable trust to make gifts to their favorite non-profit organization. The charitable trust allows you to donate generously to your chosen charity while giving you and your heirs a substantial tax break. If you want to merely make a few small gifts to a charity, setting up a charitable trust is not necessary. Before setting up a charitable trust, you should talk the matter over with your estate planner. The charitable trust requires that you give up legal control of your property, and the charitable trust is irrevocable. Once put into place, you do not have the option to change your mind and regain control of the property in the trust. Bottom line, be sure that you want to give to the charity before establishing the charitable trust.
How the Charitable Trust Works
The most commonly used charitable trust is known as a “charitable remainder” trust. This type of trust usually involves you setting up a trust and transferring the property that you want to donate to the charity to the trust. You must choose a charity that has tax-exempt status under the Internal Revenue Code. The charity will serve as a trustee of the trust, and as such will manage or invest the property, which will likely produce income for you. Income from a charitable trust can be received either as a fixed annuity or a percentage of trust assets. The charity will pay you (or your representative) a portion of the money that is generated by the trust for either a particular number of years, or in some instances, the rest of your life. You will specify the payment period in the documents of the trust. When you pass away, or at a time you specify, the property will go to the charity.
Tax Advantages of Charitable Trusts
Besides helping out the charity of your choice, you will enjoy several significant tax advantages from a charitable trust, including:
• Income tax savings. You can take a deduction on your income taxes for five years, for the value of the gift that you make. It is somewhat complex, however, to determine the deduction amount, as you must deduct the value of the income you will most likely receive from the property from the amount of the deduction. For instance, if you donate $200,000, but expect to receive $50,000 in income back, your gift value is $150,000.
• Estate tax. Because the trust property will go to the charity either at or before your death, it will no longer be included in your estate, which means that it is not subject to federal estate taxes.
• Capital gains tax. By setting up a charitable trust, you can transform appreciated property into cash without paying the capital gains tax on the profit made. Charities do not pay capital gains tax, so if the charity sells the gift, the proceeds will stay in the trust and are therefore, not taxable.
