It is such a pleasure to work with extraordinary individuals doing amazing work. The Arnerich Massena financial planning team is lucky to interact daily with men and women who are helping to find cures for cancer, solve the world’s water needs, improve the lives of society’s most vulnerable, and make the world better in a thousand small ways by giving. Our financial planning team is honored to have been part of so many 2018 conversations that involved philanthropy, and much of it through the use of charitable trusts.
Charitable trusts come in a variety of shapes and sizes, but generally fall into two categories: charitable remainder trusts and charitable lead trusts. In a charitable lead trust, a donor makes a gift, the designated charity receives an income stream for the period of the trust term, and then the remaining assets are distributed to named beneficiaries. In a charitable remainder trust, the roles are reversed – beneficiaries receive income, and the charity receives the assets at the end of the trust term.
Individuals establish charitable trusts for a number of reasons – they want to give back to the community, they like the idea of a steady income stream, and they are interested in making tax-efficient use of their dollars. This last point – tax efficiency – drove several of the larger charitable trusts that our clients established this year. There are two tax benefits to establishing a charitable trust: an income tax deduction on the charitable gift and avoidance of gains tax on the assets used to fund the trusts.
The income tax deduction is a fairly straightforward calculation, if you have the right tools to work out the math. This deduction is based on the expected value of assets that will flow to charity over the life of the trust. The amount going to charity is based on a number of factors: the length of the trust, the payout rate, a regularly-determined IRS rate, and the trust structure, among others.
The avoidance of capital gains tax is realized when a donor gives an appreciated asset to charity before the asset is sold. Consider a hypothetical investor who purchased a share of Amazon at $1 and that share is now worth $10. If our hypothetical investor sells the Amazon share and gives the sale proceeds to charity, he or she will have to pay tax on the $9 gain at the sale. On the other hand, if our investor gave the Amazon share directly to charity and the charity then sold the shares, no capital gains tax is due (provided the charity is a properly registered 501(c)(3) organization). Several of our clients funded charitable trusts in 2018 with assets that would have generated substantial tax bills had they been sold by the donor rather than the charity.
Our clients utilized charitable trusts to create lasting gifts to a wide range of beneficiaries this year. Some families used these vehicles to build income streams that will replace their paychecks in retirement, some will benefit the next generation by providing additional income to adult children, and some were established to fund a specifically defined need for income over a set number of years. If you’d like to talk about making tax-efficient use of your assets for whatever your needs are, our planning team is here and ready to help.