Trusts Might Give You Flexibility and Lower Taxes

We can do good to others and do well for ourselves in reducing taxes. 

Many people who already know which causes they should champion can benefit from straight gifts to charities.

Yet, many other people also desire to do good, but they are unsure how and when to donate. 

Other people are willing to help a specific charity, but they are not ready yet because they still need income.

Still, other people want to donate to charity, but they also want to help their children and grandchildren.

The good news is that a variety of options exist to help those who find themselves in unusual circumstances.

This is true even with the Trump tax reform.

People in such circumstances might consider 3 potential strategies that can help their situation:

1. You Want to Donate to Charity but You Don’t Know Which Ones Yet

You might be someone who knows you want to make an impact on your world. However, you have not yet figured out which charities best reflect your values. Yet, you would like to start making large contributions now.

One option is to start your own private foundation. This can offer you significant control over where your donations ultimately go later on. 

Private foundations do have drawbacks.  One drawback is the expense, since they must satisfy a host of complex rules. A second drawback is that you can contribute a lower percentage (30%) of your Adjusted Gross Income (“AGI”) to a private foundation than if you simply contributed cash to specific charities (60% of AGI). 

One potentially cheaper option to a private foundation is a donor-advised fund (“DAF”). Larger charities and investment firms offer such vehicles.  However, in order for your DAF donation to be tax deductible, you will need to obtain a letter from the sponsor of the DAF stating that it has exclusive legal control over the assets you donated.

2. You Need Income Now but Wish to Donate Your Inheritance to Charity

Some families still need the income from their investments for living expenses, yet they wish to deed over their inheritance to a charity upon death. A Charitable Remainder Trust (“CRT”) might be a viable option. 

A family might donate their money to a charity in the form of a CRT.  In exchange, the charity pays the family an annual income, some of which is taxable, over a fixed time period.  The family receives an income tax deduction for their contribution to the CRT, but their property is removed from their estate. The charity owns the property now.

Another potential benefit of a CRT is that it might help diversify your portfolio.  Large assets that generate no income or embed large capital gains might benefit from being housed within a CRT.  The family would receive financial income.  Additionally, the family would not have to pay capital gains tax.  As the CRT is a tax-exempt entity, the charity could sell the illiquid asset at some point in the future without generating a tax event for the donating family. 

It is possible to name a beneficiary other than yourself in the event you were to die before the term of the CRT were to expire.  The beneficiary would receive the remaining income from the CRT. 

3. You Want to Donate Income to Charity but Seek to Transfer Your Inheritance to Your Children (or Grandchildren)

Charitable Lead Trusts (“CLT”) can help people who seek to help both charity and their own children (or grandchildren) at a lower tax rate.

A CLT pays an amount to one or more charities periodically over the life of the Trust. When the Trust’s life expires, then the remaining assets pass on to beneficiaries designated by the original donor. Donors who fund CLT’s benefit from tax deduction of their original gift. However, the property is removed from their estate. 

For gift tax purposes, the amount of remainder interest is calculated with the assumption that the assets grow at Section 7520 rate.  If the trust’s earnings out perform the Section 7529 rate, excess earnings are transferred to the remainder beneficiaries free of both gift and estate taxes.

However, depending on what interest rates do, the increased gift and estate tax exemption might reduce your tax benefits from CLT, depending on your specific situation. Consult with a tax expert for your specific situation. 

We would be happy to give you a free consultation in navigating the complexities of leaving a legacy for good causes and less to the tax man.

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