Last December, the White House Conference on Aging held its first meeting in 10 years. The conference addressed the growing number of baby boomers reaching retirement and highlighted how a large number of them are contemplating volunteering.
More and more retirees are volunteering for charities and non-profits in an effort to contribute to their community and stay active and healthy. Even the Peace Corps has seen a large increase in the number of older volunteers. But there’s a way you can contribute to society without going overseas, and it’s called a charitable trust. It has become an increasingly popular way to contribute to charity as well as save money on taxes.
Trusts, simply put, 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, and charitable lead trusts. Charitable trusts have a host of other benefits, as well as a few drawbacks, but here are the basics.
Charitable Remainder Trust (CRT)
A charitable remainder trust 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 charitable remainder trust 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, charitable remainder trusts 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 non-profit that you feel is more deserving of your gift.
With a charitable remainder trust 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. Depending upon the type of trust, you can value the assets for distribution purposes at the time the trust is funded or on an annual basis. Some beneficiaries choose to take more, but 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, however, that income from trust assets is subject to federal income taxes.
Charitable Lead Trust (CLT)
A charitable lead trust is basically the same concept as a charitable remainder trust, 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 (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 charitable remainder trusts and charitable lead trusts offer a variety of advantages over traditional estate planning tools. Above all, they allow you to give back to society while still taking advantage of tax deductions and exclusion from capital gains taxes.
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. They can usually refer you to a known estate planning attorney who will also help. Like all estate planning options, trusts have their pros and cons, but they’re certainly a good option worth considering if you wish to save on taxes, support a good cause, and feel great about it in the process.