If you are looking to make the most of your donations to charity, you should consider a charitable remainder trust which is a valuable estate planning tool. These types of trusts will allow you to provide generous donations, while also taking advantage of very generous tax breaks for you and your beneficiaries.
How does a charitable trust work?
Charitable trusts are irrevocable, which means once they have been executed, they cannot be changed. Once you transfer property to a charitable remainder trust, you no longer have legal control over that property. A charitable remainder trust is the most common estate planning tool for individuals who want to make charitable donations. Once the trust is established, the property can easily be transferred to your chosen charity, upon your death. In order for the charitable trust to provide tax benefits, the charity must be approved by the IRS. Approved charities are those that are considered tax exempt under the Internal Revenue Code.
Additional benefits of charitable trusts
In addition to providing certain tax benefits, charitable remainder trusts also provide income throughout your lifetime. Your chosen charity operates as trustee of the trust property, thereby allowing the charity to manage and invest the property, providing income to you during your lifetime. Put another way, the charity will pay you or your named beneficiaries a percentage of the income generated by the trust, for a certain period of time. Either after your death, or at the termination of the trust period, the remaining property goes to the charity.
Income tax deductions
The income tax deduction for contributions through a charitable remainder trust can be extended over five years. Figuring out the appropriate amount of the deduction can be difficult, because you must consider more than just the value of the property. The IRS will deduct from the value of the property, the amount of income you are likely to receive from the investment of that property.
Estate tax benefits
There are also certain estate tax benefits that can be enjoyed, once you have established a charitable remainder trust. When the trust property is transferred to the charity, upon your death or at the end of the trust period, it will no longer be a part of your estate, meaning that it is no longer subject to federal estate taxes.
Income from a Charitable Remainder Trust
You can basically receive income from a charitable remainder trust in one of two ways. First, you can create a fixed annuity or payment regular payment of a percentage of the trust assets. This is the best option if you want to receive the same amount each year, regardless of the income the trust has earned. The most common choice is simply receiving a percentage of the current value of the property in the trust. The assets are appraised once a year, to determine the percentage you will receive. Under the IRS rules, you must receive a minimum of 5% of the trust property value each year.
If you have questions regarding charitable remainder trusts, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.