Sophisticated charitable giving is not for the faint of heart. In March and June I covered some charitable planning strategies that anyone can use. For my last article of this series, I will touch upon charitable giving techniques more often used by the wealthy: charitable trusts and private foundations.
A trust is a fiduciary relationship in which one party, "the trustor," gives another party, "the trustee," the right to hold title to assets for the benefit of a third party, "the beneficiary." With charitable trusts, the trustor is the donor and the beneficiary is often charity or other designated person(s).
Here's how it works:
Charitable Remainder Trusts - ("CRTs") are trusts into which assets are placed for the (eventual) benefit of charity. For a specified time (usually donor's lifetime), the trust will pay income to a non-charitable beneficiary (often, the original donor). When that time expires (usually, when the donor
dies), assets remaining in the trust are distributed to designated charity(ies).
CRTs are typically used when a donor has: 1) appreciated assets he/she won't sell for tax reasons, 2) a need for steady income, and 3) no heirs, or heirs taken care of elsewhere. Asset(s) commonly used in CRTs are appreciated investments held over one year. The donor gets a tax deduction for a portion of the market value donated, and the trust income will be taxable in the year(s) received.
This strategy enables donors to put assets to work for their lifetime benefit in ways they couldn't if held individually. Once inside a CRT, assets are considered outside the estate, so potentially, some estate taxes are avoided. But beware: CRTs are irrevocable, so the value of assets placed in them is there until its term ends. Once established, donors may change the charity(ies) the CRT benefits, but he/she can't change the income beneficiary(ies).
Charitable Lead Trusts - ("CLTs") are also trusts into which assets are placed, but in this case, the charity receives the trust income for a specified time (usually, the donor's lifetime) and when that time expires (e.g. the donor dies), the remaining assets usually pass to the donor's heirs (not charity).
CLTs are typically used when the donor has: 1) income-producing assets he/she doesn't need anymore and 2) heirs to benefit from inheriting the assets someday. Asset(s) commonly used in CLTs are property(ies) producing good rental income. The donor gets a tax deduction for a portion of the market value donated, but usually, the biggest donor benefit is to move an appreciating asset out of his/her estate, avoid estate taxes, and still pass the asset(s) on to heirs.
These trusts are also irrevocable, so the value of the asset(s) placed in a CLT is there until its term ends, and the donor's heirs don't have access to, or benefit from, the asset(s) until the donor-directed term expires.
Private Family Foundations - are probably the most complex charitable strategy an individual can utilize: placing assets into his/her own non-profit organization that makes grants to charitable causes. Private foundations can be created during one's lifetime or via bequest from a donor's estate (or via IRA beneficiary).
These organizations can be run by donor/trustees and/or management, and can survive well beyond a donor's lifetime. IRS guidelines for donating to & operating these entities are quite different than for public charities (aka "501(c) (3) organizations").
The complexities involved with establishing/maintaining any one of these charitable giving strategies require the careful work of qualified attorneys, accountants and financial planners. This information is not intended to be a substitute for specific individualized tax advice.
Do not try this at home! That may be where charity begins, but to make the most of it requires competent professional help.
Karin Grablin, a registered representative & investment advisory representative, can be reached at 941-556-9004 or email@example.com. This information in her column is not intended to be a substitute for specific, individualized tax, legal or investment planning advice.