Tax Savings with a Charitable Remainder Trust

The charitable remainder trust is a vehicle for exercising your charitable nature and enjoying tax advantages as well. It is only viable at a time when you are ready to dedicate a large donation and you are certain in your resolve. This is because the charitable remainder trust is irrevocable. You cannot reverse your decision and reacquire the assets you placed into the trust.

The Charitable Remainder Trust Setup

The charitable remainder trustⁱ is the most common type of trust for charitable purposes. You set up the trust and transfer into it all the assets/property that you want to donate to the charity. Check with the IRS to verify that the charity of your choice is tax exemptⁱⁱ. This is a complicated topic and setupⁱⁱⁱ, and you will want to work with professionals to do it properly.

The charity serves as the trustee, assuming the duties of protecting, investing, and managing the trust and assets. Depending on how you set up the trust, you will be paid a portion of the trust income over a set period of years or for the remainder of your life. Either way, at the time of your death the trust will end, and the assets will pass to the charity.

The Types of Payment

There are two types of payment to you, and you will select one at the time you set up the trust. It is how you will receive income from the trust.

Annuity – These are set payments over time, and there is a balancing procedure here. Setting them too low will give you better tax breaks, but you will not receive the full benefit of income from the trust over time. Setting them too high will lower your tax breaks, and many charities will not want to be trustees with high annuity payments, as they may exhaust the assets before your death.
Percentage Payments – Using this method, you would receive a set percentage of the value of the assets in the trust each year. As an example, if you are to receive a 4% of the asset value each year, the assets would be appraised at the end of the year and you would receive a payment of 4% of that appraised value.

The percentage payment method is often preferred, as it allows the trust payments to vary with market conditions and performance of the trust each year.

The Tax Advantages

There are three significant tax advantages provided by the charitable remainder trust.

Gift Value Deduction – You can take a tax deduction for the amount you contributed to start the trust and to spread that deduction over five years. There is an adjustment to that amount for the amount in income you expect to receive from the trust over that five-year period. In other words, if you contribute $250,000 in assets to the trust, and you expect to receive $100,000 for income over the first five years, you would only be allowed to deduct $150,000.
Estate Tax – Because the property in the trust goes to the charity at your death, your estate will not be taxed on its value.
Conversion to Income – If you have assets, investments, or property, that are not generating income, instead of selling them and paying capital gains, placing them into the charitable remainder trust allows you to receive income from them without the capital gains liability from a sale.

The business owner or individual with assets and the desire to contribute to charity should consult with financial professionals to see if the charitable remainder trust is an option for their financial planning.

i Tax Incentives of a Charitable Remainder Trust, FindLaw.com

ii Tax exemption, IRS website.

iii 26 US Code 664-Charitable Remainder Trust, Cornell.edu