Many people satisfy their charitable goals by simply writing a check to their favorite charity or including a gift to charity in their Will. However, a charitable trust can help achieve mutiple planning benefits including; providing for a charity, allowing an individual (including yourself) to retain an annuity from the trust, creating immediate income tax deductions, and creating estate tax savings. As we will discuss below, a charitable remainder trust is often an attractive option to an individual with a low basis asset that wish to sell the asset, but avoid the immediate capital gains tax.
When a charitable remainder annuity trust is established, a donor transfers cash and/or property to an irrevocable trust and also retains a fixed annuity from that trust.
At the end of the trust term, the remainder of the trust passes to the charity the donor has specified in the trust. This amount could be greater than the intial amount transferred to the trust or less than that amount. The ulitmate amount paid to the charity will depend on the terms the indivual includes in the trust and the investment performance of the trust assets during the term of the trust.
A gift to a charitable remainder annuity trust will qualify for income and gift tax charitable deductions (or an estate tax charitable deduction) only if the following conditions are met:
- A fixed percentage (not less than 5% nor more than 50%) of the initial fair market value of the turst assets is paid to one or more non-charitable beneficiaries who are living when the unitrust is established. The charity's actuarial interest must be at least 10% of any assets transferred to the trust.
- No sum can be paid except the annuity amount during the term of the trust and at the end of the term of the trust, the entire balance of the trust's assets must be paid to one or more qualified charities.
The donor receives an immediate income tax deduction for the present value of the remainder interest that will pass to the charity at the end of the term.
IMMEDIATE CAPITAL GAINS TAX SAVINGS
Because a charitable remainder annuity trust is exempt from federal income tax (the income and gains of the trust are only taxed when they are distributed to the noncharitable beneficiaries each year), they are frequently used to defer income tax on gains about to be realized. For example, if a donor has an appreciated asset that is about to be sold, the donor can give the asset to a charitable remainder trust, reserving the right to received an annuity based on a fixed percentage of the initial value of the trust for life, and for the life of the donor's spouse as well, and the asset can then be sold by the trust and the proceeds of sale reinvested without payment of any federal income tax on capital gains. The capital gains will be taxable to the donor (or the donor's spouse) only as they are distributed to the donor as part of the annual distributions from the trust.
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Holden Campbell, LLC Annapolis Estate Planning Attorneys