tax considerations       


Charitable Trusts


Another kind of Trust may be advantageous for some people. It is less flexible than a Living Trust, but in the proper circumstances, it may be very useful.

A Charitable Remainder Trust allows the owner to contribute property to a self-controlled nonprofit Trust. The owner (and his spouse) have the right to take out a predetermined amount of income (set by them) from the Trust during their lifetimes. After the death of both owners, the assets will go to their favorite charity.

During the lifetimes of the owners, there are no taxes until the income is distributed to the owners.

Although it can be structured in many ways, the basic plan is as follows:

  • You have a low cost stock or other asset (either purchased or earned from employment) and want to sell for either economic reasons or to diversify, but the anticipated tax is very high. You can contribute the asset to a Charitable Trust. You manage the Trust, control the investments and assets, and sell assets tax free as you desire.
  • You set the percentage of income you want, with a minimum of 5% per year. There is no maximum.
  • You pay tax only on the money taken out of the Trust each year - no tax is paid on any profit, until it is withdrawn from the Trust.

As with a Living Trust, you are the sole manager. However, you cannot change any terms of the Charitable Trust, other than to appoint a different charity to take the assets at your deaths.

  • [In a Living Trust, you can change any part at any time. With a Charitable Trust, you can change only the charity.]

Another advantage is a charitable deduction on current income tax return immediately upon formation of the Charitable Trust. The deduction is based on your life expectancy and income rate, so it is not large. For example, if you and your spouse are in your mid- 40's, you have a life expectancy of 40+ years. If you select a 5% return, your current tax deduction may be only 17% of the value of the contribution, because the charity will not actually receive the gift until 40 years from now, and you will be taking out 5% each year until then.

The drawback to Charitable Trust is that it cannot be changed even in a dire emergency.

Since the charity gets the Trust balance at your death, many people also use an Insurance Trust as a "wealth replacement" vehicle to leave assets tax free to their heirs.

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.