Many clients take advantage of our Legacy System to fully educate themselves and their families about all of the options available to them in modern estate planning, including providing a personalized planning structure for loved ones, passing along one’s values through planning (purposeful planning), providing a shell of protection (asset protection) for the shares of spouses, children, grandchildren, and other beneficiaries, maximizing the tax advantages of hard-earned retirement plans (IRAs and plans at work) for the benefit of loved ones, using trust protectors and independent trustees, and more. In doing so, these clients create a lasting legacy, a plan that stands the test of time due to its sound legal structure, creative personal design, and maintenance throughout lifetime. However, despite the time and effort expended on these marvelous core estate plans, many thoughtful clients still overlook the possibilities of charitable planning. For clients who are charitably inclined, this is usually due to a loss of momentum caused by insufficient knowledge about the advantages and benefits of charitable giving.
For example, charitable giving in its simplest form – an outright charitable gift during lifetime – has the following advantages: (1) you receive an income tax charitable deduction – an example of this deduction is as follows. John makes a $50,000 donation to his favorite qualified organization and itemizes his deduction(s) on his tax return. John’s tax savings will depend on his tax bracket as the deduction is limited by Section 170 of the Internal Revenue Code; and (2) you receive a gift tax charitable deduction – this deduction is unlimited and eliminates gift tax for gifts made during lifetime. In our hypothetical prior example, since John donated cash, the entire value of the gift is excluded from gift tax. The first $13,000.00 is excluded by way of the “annual exclusion” from gift tax, and the balance is excluded under the gift tax charitable deduction.
You can also receive an estate tax charitable deduction if you leave property to certain qualified charities at your death. This deduction is also unlimited and eliminates estate tax to the extent that the bequest, legacy, or transfer qualifies for the deduction. Changing our hypothetical prior example, if John left $5 million dollars to a qualified charity at his death, his estate would avoid estate taxation on the entire $5 million dollars because the transfer to the charity qualifies for the unlimited estate tax charitable deduction.
Because the Internal Revenue Code encourages charitable giving, there are many planning choices available to the charitably minded individual or couple beyond simple outright gifts during life or direct transfers at death. One of the most popular of these choices is the charitable remainder trust. In simple terms, a charitable remainder trust is a trust that holds property transferred to it for a certain period of time (for periods up to 20 years) during which time the trust pays an income to the lifetime beneficiaries of the trust (pays an income to the non-charitable beneficiaries), and after the period is over, the trust terminates and the trust funds are paid to designated charitable beneficiary. The income distribution to the non-charitable beneficiaries (you; or you and your spouse; or possibly you, your spouse, and your children) is paid at least annually and must be an amount that is not less than 5 percent of the initial net fair market value of all property placed in the trust (in the case of a charitable remainder annuity Trust, otherwise known as a “CRAT”); or a fixed percentage which is not less than 5 percent of the net fair market value of the trust assets, valued annually (in the case of a charitable remainder unitrust “CRUT”). The charitable interest (the remainder interest that goes to the specified charity) must be at least ten percent (10%) of the net fair market value of all property initially placed in the trust. Charitable remainder trusts (“CRTs”) are governed by the statutory provisions of Section 664 of the Internal Revenue Code.
When you transfer property to a charitable remainder trust, you receive the following tax advantages: (a) after transferring property to the trust, you, the grantor and donor, receive an income tax charitable deduction (described above). This deduction is available in the year of the transfer of the property to the trust and is equal to the actuarial value of the charitable remainder interest in the trust. However, as mentioned above, the deduction is subject to certain limitations; (b) you escape capital gains tax upon the trust’s sale of appreciated property transferred to the trust; (c) income accumulates inside the trust tax free; (d) there is no income tax to the non-charitable beneficiaries of the trust until their receipt of trust property; (e) the property transferred to the trust passes to the charitable beneficiary estate tax free; and (f) you, as the donor of the property, can serve as trustee and control the investments of the trust.
An example of a charitable remainder trust is as follows. Tom, a 75 year old retiree, wishes to increase his income. Tom owns stock that he purchased many years ago for $25,000 that has now greatly appreciated in value to $200,000. If Tom were to sell his stock he would pay capital gains tax on the entire $175,000 appreciation in the stock’s value. Instead, Tom can transfer the stock to a charitable remainder trust, choose a fixed percentage income payout or a “unitrust” payout (percentage amount valued annually) for a specified period of years, sell the stock inside the trust without any capital gains tax, enjoy an income tax charitable deduction, and leave a legacy to his favorite qualified charitable organization estate tax free.
Examples like this show that a win-win situation exists for you and for your favorite charitable organization. So don’t let a lack of momentum stop you from experiencing the benefits (as well as the joy) of planned charitable giving. Remember that along with your carefully constructed core estate plan, you can also structure a charitable giving plan that speaks to your Legacy and all of the love, passion, and enthusiasm you feel for your favorite cause.