Charitable Trusts Part I: The Charitable Remainder Trust

Funding a charitable trust can help you provide financial support to the charitable causes you care about, as well as pursue personal financial objectives. Two types of charitable trusts – the charitable remainder trust and the charitable lead trust - are introduced here.

Each type of trust operates quite differently from the other and is used to achieve different objectives. If you are interested in retaining an income from the assets you donate, then a charitable remainder trust may be the one for you. If you are looking for specific tax benefits, such as the ability to transfer assets to your children at a reduced gift or estate tax cost, then a charitable lead trust may be a better choice. The two types of trusts have one thing in common: There are significant costs associated with setting them up and running them so usually the charitable gift must be sizable in order to justify the expense.

Charitable Remainder Trust

A charitable remainder trust enables you to retain an income for life from the trust with the amount remaining in the trust when the trust ends going to charity.

Here’s how it usually works. You set up the trust and irrevocably transfer cash or appreciated assets to it. The person or organization who manages the trust (the trustee) invests the assets and pays a stream of income to you or other beneficiaries you choose. You can select the rate used to calculate the income payments. (Most donors choose a rate in the five to seven percent range.) You can also choose whether the income payments will last for the beneficiary’s lifetime or for a specified period of years. When the term of the trust ends, any assets remaining in it are transferred to your selected charities.

This type of trust tends to be especially effective when highly appreciated assets are used to fund it.

Let’s say you have a sizeable chunk of stock that has dramatically appreciated in value since you received it, but that is yielding little or no current income. You would like to generate more income for yourself or others. You could sell the stock and reinvest the proceeds in potentially higher-yielding stocks, but the capital gains tax on your profits from the sale may dramatically diminish the amount you have left to reinvest. Or you could donate it to a charitable remainder trust.

The trustee can sell the donated stock (or other assets) without immediately owing capital gains tax on the profits. This leaves the entire proceeds available to be reinvested and may result in a larger stream of income for you than if you had sold the stock yourself and reinvested the amount remaining after taxes.

Donating to a charitable remainder trust also offers you an immediate charitable tax deduction for a portion of your gift, which may benefit your current income tax situation. And a charitable remainder trust may also benefit your estate tax situation because assets in the trust are not counted as part of your estate.

There are two basic types of charitable remainder trusts: The charitable remainder annuity trust and the charitable remainder unitrust.

The annuity trust pays the beneficiaries a fixed amount every year based on the trust’s initial value.

The unitrust generally pays the beneficiaries a fixed percentage of the trust’s assets as they are valued each year. As a result, unitrust payments will fluctuate in value. When the trust investments perform well and the trust increases in value, the income amount will increase. When the trust value decreases, the income amount will decrease.

Copper Leaf Financial can help you determine whether a charitable remainder trust may be a good choice for your philanthropic and financial objectives, as well as which type of charitable remainder trust may suit you better.

In some circumstances, other types of life income gifts may also be worthy of your consideration. Many charitable organizations offer pooled income funds and charitable gift annuities, which will pay you an income for life in return for your charitable gift. Although these two options do not offer the flexibility of a charitable remainder trust, they can help you meet some of the same financial objectives, generally at a lower cost.

With offices in Williston and Rutland Vermont, Copper Leaf Financial is a Registered Investment Advisor (RIA) dedicated to holistic, transparent, evidence-based advice. We are a fiduciary, fee-only firm serving clients with objectivity and integrity on all financial planning areas including charitable giving for more than 25 years. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.

See Also: "Charitable Trusts Part II: Charitable Lead Trusts"

Article published in January 2017 edition of Eye on Money.