Michael L. Thompson, CAP®, AIF®, AEP®, is a Senior Wealth Advisor with our affiliated wealth planning firm *Copper Leaf Financial. He has published a new article about charitable trusts – a smart tool to consider as it pertains to your legacy planning. Check out the new article below and be sure to reach out to Copper Leaf if you would like to schedule a strategy session and find out how we can help you achieve your philanthropic goals.
Make an impact beyond your lifetime: Is it time to consider a charitable trust?
There may come a time in your life when you consider the legacy you will leave for others. If you are fortunate to have accumulated enough wealth to meet your needs for as long as you are alive, then you will want to consider the impact of your legacy and some of the tools available for smart planning.
One such tool is a charitable trust. Charitable trusts are smart financial tools designed to support philanthropic causes, have an impact beyond your lifetime, and create income opportunities along the way.
A charitable trust is a legal instrument whereby a donor gives ownership to a charity or philanthropic entity to manage and distribute assets such as cash, securities, and other valuables. Not only does the donor do a good deed, but the IRS also offers attractive tax benefits for creating the trust. There are two types of charitable trusts: charitable remainder trusts and charitable lead trusts. Deciding which, if any, type is a good fit for you will depend on careful planning with your wealth advisor and attorney. In this article we will focus on charitable reminder trusts. We will save charitable lead trusts for another day.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is an irrevocable trust that generates a potential stream of income for you, as the donor, or to other beneficiaries, with the remainder of the assets going to your favorite charity, or charities, either at your death or after a specified time period.
This approach has the benefit of generating income and can enable the donor to support philanthropic goals while also helping to provide for living expenses. Charitable trusts can offer flexibility and some control over your intended charitable beneficiaries as well as lifetime income thereby helping with retirement, estate planning, and tax management.
How a charitable remainder trust works
A charitable remainder trust is known as a “split interest” giving vehicle that allows the donor to make contributions to the trust which may be eligible for a partial tax deduction, based on the CRT’s expected value at the time it passes to the charitable beneficiaries. The donor can name themselves or someone else as a recipient of a potential income stream for up to twenty years, or for the life of one or more non-charitable beneficiaries, and then name one or more charities to receive the remainder of the assets in the trust. There are two main types of charitable remainder trusts: charitable remainder annuity trusts (CRATs), and charitable remainder unitrusts (CRUTs), but we will leave further discussion of the differences to another post.
Contributions to CRTs of either type constitute an irrevocable gift or transfer of cash or property. Periodic distributions are required to either the donor or a specified beneficiary. At the end of the specific time income term or period, or the specified lifetime, the remaining trust assets are distributed to one or more charitable remainder beneficiaries.
Once the trust legal framework is established, the donor then makes a gift or donation of cash, stock, or non-publicly traded assets such as real estate, private business interests, or private company stock and is then eligible to take a partial tax deduction. The partial income tax deduction is based on the type of trust, the term of the trust, the projected income payments, and the IRS interest rates that assume a certain rate of growth of trust assets.
The next consideration is the income stream. Depending on how you set up your trust, you or your chosen beneficiaries will receive income from the trust annually, semi-annually, quarterly or monthly.. The IRS requires that the annual income payments must be at least 5% but no more than 50% of the trust’s assets.
Finally, after the specified time period or the death of the last income beneficiary, the value of the remaining assets are distributed to the designated charity. In other words, the CRT will terminate after the specified time and the charity or charities you have chosen will receive what’s left in the trust. The charitable beneficiaries can be public charities — including a donor — advised fund, or private foundations. Depending on how the CRT is established the trustee may be able to change the charitable beneficiary during the lifetime of the trust.
Using a CRT with a donor advised fund
Combining a donor advised fund (DAF) with a CRT strategy can provide meaningful flexibility to someone considering this kind of charitable approach. Because the DAF, as a public charity, may qualify as an appropriate charitable beneficiary, the donor can easily adjust and recommend a variety of grant recipients and even pass along granting authority as a long-term legacy. This can eliminate some of the anxiety about choosing a charitable organization many years ahead of the termination of the trust.
Proper prior planning required
Whether or not a CRT makes sense for your specific situation depends upon a number of factors. It is essential to consider all aspects of your financial plan including current and future anticipated taxes, lifetime income needs, family legacy and gifting considerations, health concerns, portfolio, business interests, inheritance, and your overall estate and retirement needs. Charitable trusts can be valuable tools for wealthy families with generous hearts who want to have a positive impact on issues or causes important to them, who may have a need for extra income for themselves or others, and who want to take advantage of an opportunity to minimize taxes.
Written by Michael L. Thompson, CAP®, AIF®, AEP®
Serving Northern New England with offices in the Burlington Metro area, Copper Leaf Financial can help you maximize your charitable giving efforts and create a legacy plan for the future – a plan that includes intentional giving and overall alignment between your values, your savings, investments, your charitable giving & philanthropy, and your community and lifestyle. For more information about our charitable planning services please click here or call us today at 802-878.2731 to schedule a strategy session and find out how we can help you achieve your philanthropic goals.
*Copper Leaf Financial is an affiliated and separately registered entity.