If you are contemplating a major philanthropic contribution, James H. Wilson Law Firm encourages you to explore the advantages of establishing a charitable trust. Charitable trusts provide a means to give substantially, benefiting both your chosen charity and your financial standing through substantial tax incentives.
However, if your charitable intentions are on a smaller scale, a charitable trust may not be the most practical course of action.
Implementing a charitable trust requires thoughtful consideration, as these trusts are irrevocable. After initiation, the assets placed in the trust are no longer under your control.
Among charitable trusts, the charitable remainder trust is prevalent. This trust works as follows:
You create the trust, transferring ownership of the assets you wish to donate to the organization, which is recognized by the IRS for its tax-exempt status.
The charity, as trustee, manages and invests these assets to generate income. You can designate that the income be paid to you or a chosen beneficiary for a set number of years or the remainder of your life. This stipulation is clearly defined in the trust agreement. Subsequently, upon your passing or at the conclusion of the defined period, the remaining assets are transferred to the charity.
Establishing a charitable trust not only supports your philanthropic goals but also offers several tax benefits:
For the market value of your donated assets, you can claim an income tax deduction spread over five years. However, the deductible amount is not the total value of the assets but reduced by the projected income you may receive. For example, a donation worth $100,000, expected to generate $25,000 in income for you, translates to a taxable gift of $75,000.
When the trust’s assets are ultimately bestowed to the charity—posthumously or at the end of the predefined period—they do not form part of your estate, hence are exempt from federal estate tax. Generally, estate tax is only imposed on significantly large estates.
Charitable trusts can convert appreciating assets into cash without incurring capital gains tax. In contrast, if you were to sell these assets, capital gains tax on the profit would be payable. Charitable organizations, however, do not pay capital gains tax, which means the full proceeds from such sales can be reinvested by the trust tax-free.
Example:
Toni has stocks valued at $300,000, originally purchased for $20,000. She establishes a charitable trust with Greenpeace as the beneficiary and funds the trust with her stock. Greenpeace sells the stock, invests the sum, and Toni receives income without incurring capital gains tax on the substantial profit.
Charitable remainder trusts can be arranged to provide income in two fundamental ways:
Fixed Annuity:
You receive a predetermined annual amount, unaffected by the trust’s income fluctuations. This amount is fixed upon the trust’s activation and cannot be altered in the future.
Percentage of Trust Assets:
Your annual income can be set as a percentage of the trust’s current asset value, typically reassessed annually. This is advantageous against inflation or asset appreciation, increasing your income proportionally, subject to a minimum 5% annual payout as per IRS regulations.
Example:
Felix owns stock, initially worth $400,000, now worth $1.6 million, which yields minimal dividends. By forming a charitable remainder trust in favor of his alma mater, he avoids capital gains tax and secures an income tax deduction, calculated based on his age and current interest rates, spread over five years. The charity sells the stock and reinvests, paying Felix 6% of the trust’s value annually for life, with the payments destined to rise following the trust’s asset reevaluation.
For personal guidance on structuring your charitable trust and to ensure you meet all the necessary legal requirements, contact James H. Wilson Law Firm at 804.740.6464 to tailor your philanthropic endeavors for maximum benefit to both you and your chosen charity.