Many of us are feeling excited for the new year. It always symbolizes renewed hope and new chances to make the world a better place. One way people are achieving this is through the use of charitable remainder trusts. These trusts allow you to make generous donations to charity while also providing impressive tax breaks for your heirs. While it really is that simple, there are a few legalities you’ll need to consider. Your estate planning lawyer can provide guidance so that everyone benefits from your efforts.
Up first, you’ll need to determine whether your charitable trust will come with an irrevocable distinction. If so, you’ve chosen the right financial vehicle. Remember, though, once it’s done, you can’t rescind it.
As your estate planning lawyer, I and my team will set up the trust and will work with you to ensure the property and assets you’ve chosen are included. This is important: there is an IRS approval you need because of the tax exempt status. Again, we’ll work with you to cover that base.
Once that’s been established, and as is the case with all irrevocable trusts, the charity is named the trustee. That means it has full rights to manage, invest or otherwise do as it sees fit to ensure an income. The charity will pay you a portion of that income that it’s now generating in usually one of two ways.
You might opt to receive an annual annuity, via a fixed dollar amount. If the trust isn’t churning as many profits as you had hoped for, you’ll still receive that annual annuity.
Your other option is to designate a percentage of the value of the property. Of course, this introduces the possibility that you won’t earn as much, especially if it’s been a bad year.
Now, as we set the trust up, you’ll be asked if there’s a life expectancy of the trust. You can designate that it continues until your death or you may also set a time limit. At the point the charity trust matures, via your predetermined time period, the remaining property is then given to the charity.
For the first five years, you can deduct the value of the charity from your taxes. And speaking of taxes, remember that the value is calculated by the IRS. It deducts from that value the amount of income you’re likely to receive from the property. For example, if you donate $100,000 but can expect to get $25,000 in income back (based on your life expectancy, interest rates and how the trust document is set up), the value of your gift is $75,000.
And by the way, did you know you can use the charitable trust as a vehicle for bypassing capital gains taxes on your profits? This is especially important if your property has significantly increased in its value.
Remember, though, be sure to speak with your estate planning attorney to ensure you’re first, in compliance with IRS rules and second, you’re incorporating every financial tool that’s available.