Estate Planning: Supporting a Noble Cause

Physician's Money Digest, October 2006, Volume 13, Issue 10

Charitable trusts are a handy tax-saving tool. But they can also greatly benefit a charity of your choice. More and more retirees are volunteering for charities and nonprofit organizations in an effort to contribute to their community and stay active and healthy. Because of the retiring baby boom generation, even the Peace Corps has seen a large increase in the number of older volunteers. But you can contribute to society—and save money on taxes—without going overseas, by contributing to a charitable trust.

Trusts are a way for you to transfer assets and property into one solitary group. With a charitable trust, the assets and property contained within it provide an income for you during your lifetime. After you pass away, the remaining assets are given to the charity within the trust. There are two major forms of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).

Charitable Remainder Trust

A CRT has two beneficiaries. In most cases, one of them is you and possibly your spouse, and the other is the qualified charity or tax-exempt organization you plan on supporting. During your lifetime, you receive a set percentage of income from the charitable trust. Once you pass away, the charity then receives whatever is left over. If your spouse was receiving income as well, he or she will continue receiving it until passing away.

One of the benefits of a CRT is that you may be able to become the trustee and make decisions about the assets within the trust, including investment choices and other important matters. Unfortunately, CRTs are irrevocable, but you may be able to change the beneficiaries when you wish. This allows you some degree of personal freedom, especially if you find a charity or nonprofit organization that you feel is more deserving of your gift.

With a CRT you get to choose the amount of income you'll be paid from the trust on an annual basis. According to the IRS, every year you must distribute at least 5% of the value of the trust's assets. It's generally recommended to take no more than 10%.

All realized profit from investment sales within the trust is not subject to capital gains tax. This is because you are benefiting a charity. Charitable trusts are especially helpful when it comes to highly appreciated assets with limited income-producing potential. By avoiding the capital gains tax, more money goes to your charity instead of Uncle Sam. You also get an income tax deduction because your CRT supports a charity. Please note that income from trust assets is subject to federal income taxes.

Charitable Lead Trust

A CLT is basically the same concept as a CRT, but in reverse. With a CLT, a charity receives a certain percentage of income every year. Once you pass away, whoever you've named as the beneficiary (eg, a spouse or children) receives the assets that remain. A CLT offers the same advantages of a remainder trust, but the roles are reversed.

Both CRTs and CLTs offer a variety of advantages over traditional estate planning tools. But there are numerous details and complex steps to take when looking at a charitable trust as an estate planning option. You should always find a trusted financial professional to help guide you through the process. Like all estate planning options, charity trusts have their pros and cons, but they're certainly a good option if you wish to save on taxes, support a good cause, and feel great about it in the process.