Charitable Trusts. proof

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1 P l a n n i n g Y o u r F i n a n c e s Trusts

2 It s a double satisfaction. Give to a charity and feel good because you have helped the charity s work. Feel as good or better because you have also helped yourself to lower taxes. But for the best feeling, use a charitable trust. Get your tax deduction now, and effectively postpone your gift for years. Or, deduct now, and get your gift back years from now. A charitable trust is one of the best deals in the tax code, and it s well worth considering. Deduction nbuilding Trustsn For many decades, the finest friend any charitable organization could have has been the federal tax code. contributions are deductible, within certain limits, in calculating income, estate, and gift taxes. And contributions can be in the form of cash or. Deductibility is a strong incentive for most charitable gifts, and it is a large part of the reason why Americans are generous givers to charitable causes. If you are considering a major gift to a registered charitable organization, however, it can be very advantageous to make your gift by using a charitable trust. Like every other trust, a charitable trust is a legal arrangement that you use to transfer to a trustee, who is required to

3 use the as you specify for the benefit of the person or organization you name the beneficiary. So, you indirectly make your gift to the charity of your choice by passing it through your trustee. The trustee receives the cash, securities, or other from you, along with exact instructions on the gift. The trustee then follows those instructions and makes the gift to the charity for you. You can give during your lifetime or through your will. Using a trustee as intermediary lets you split ownership interest in the trust s assets between the charity and another beneficiary. And that means valuable added tax benefits. To split the ownership of your gift, you define the period during which the charity will benefit from ownership and the time later or earlier during which your other beneficiary will benefit: The charity can receive your gift after your other beneficiary. For example, you could have your trustee give 10,000 shares of stock to a charity, but give all the income from those shares to your children while they live. The charity receives control of the stock only after the death of your last child. Or, the charity can receive the benefit first. Your charitable gift could consist of all the income from your shares for 20 years, but at the end of that period, your children would own the stock outright. Both ways to split ownership known respectively as the charitable remainder trust and the charitable lead trust allow the donor to take an immediate income-tax deduction. nremainder Trustn A charitable remainder trust is a legal arrangement you can use to give to a charity now, but make your gift effective only after you or another income beneficiary has received income from the gift for life or a certain number of years. This kind of trust has a great advantage over simply making an outright gift. That advantage is the present tax deduction you can take for what is effectively a future gift. A charitable remainder trust lets you: Give now Deduct now Deliver the gift later This delayed delivery lets you or your other beneficiary continue to receive the income from the gift during the time before your trustee hands the trust s assets over to the charity. For the tax year when you establish the trust, you can deduct the present value of the charity s interest in the charitable remainder the assets the charity will

4 ultimately receive. You can still take your deduction if you are the beneficiary who receives the trust s income during the term of your trust. To qualify for a deduction, a charitable remainder trust must be in the form of a unitrust or annuity trust. (A pooled income fund is also a possible form, but the charitable organization creates the fund, rather than an individual.) A unitrust pays the income beneficiary a fixed annual percentage of the trust assets value. The percentage payment remains the same for the entire term of the trust, but the amount paid varies as the market value of the trust assets changes. The annual minimum needed to qualify for a deduction is 5% of the net fair market value of the trust s assets, determined each year. For example, if your gift placed in the trust has a net fair market value of $200,000, the first year s payment must be at least $10,000. With an increase in value the next year to $220,000, the minimum payment would rise to $11,000. With a decrease to $180,000, the minimum would fall to $9,000. An annuity trust pays a fixed annual amount to the income beneficiary throughout the term of the trust. Remainder Trust Lead Trust you you trust term trust income trust (remainder) charity income charity trust term

5 The annual minimum payment to qualify for a deduction is 5% of the net fair market value of the originally placed in the trust. This minimum does not change as the trust s assets gain or lose value. So, if you place $400,000 in a $20,000 payment annuity trust for 15 years, your income beneficiary will receive the same $20,000 amount in each of the 15 years. The law also places limits on the maximum amount of any retained income interest and places a minimum percentage value on the charity s remainder interest. nlead Trustn A charitable lead trust is a gift arrangement that lets the charity benefit first. The charity receives the trust income during the term you set for the trust. At the end of the term, your noncharitable beneficiary receives ownership of the trust. With this trust you can: Give now Deliver the gift now Deduct now Get your back for your beneficiary later A charitable lead trust will generally produce a lower deduction amount than a charitable remainder trust. So, it is much less frequently used. It may be the more desirable choice, however, if you have little need for immediate income and are willing to trade some current income for tax advantages. Comparing Deductions CHARITABLE CHARITABLE REMAINDER LEAD ANNUITY TRUST ANNUITY TRUST Fair market value of trust $200,000 $200,000 Payment years deduction $120,482 $79,518 Deductible portion of trust s value % % (Assumption: a 5% annuity rate with one $10,000 payout annually at year-end and a 4.4% table interest rate factor. Earlier and more frequent distributions and differences in the interest rate factor will change the deduction amounts slightly.) ndeductionn Amounts The amounts a charitable remainder trust pays to your beneficiary affect your deduction amount inversely. Higher payments reduce the remainder that you can deduct. Lower payments increase the remainder and, thus, the deduction. IRS formulas and tables specify the value you must use for the charitable organization s remainder interest.

6 With a charitable lead trust, there is a direct relationship between payments and deductions. Higher payments and a longer term result in a higher deduction. IRS formulas and tables also determine the amount of this deduction. The amount you can deduct for your charitable gift, with or without a trust, is also subject to the Internal Revenue Code s overall limitations on income-tax deductions for charitable contributions. These limitations generally allow taxpayers to deduct no more than a set percentage of adjusted gross income. The limitations that apply depend on the type of contributed and the identity of each donor and charity. Not unreasonably, valuations must be realistic and based on more than the taxpayer s say-so. trusts also may be useful in reducing gift or estate taxes. Determining the best strategy for you will require an analysis of your personal tax and financial situation. The decision to make a sizable charitable gift requires expert help to ensure that you receive the maximum tax benefit. We are experienced in helping individuals set up charitable trusts. With our help, you can use a charitable trust to achieve the double satisfaction that should be part of any major charitable gift. Please contact us about your donation. Copyright 1993, 1997, 1998, 2000, 2003, 2004 by NPI 2:15 (1/04)