The idea of giving to charity would seem to be simple, but the simple methods aren’t always the best ones. Sometimes a bit of financial finesse can go a long way toward helping both your charity of choice and your own finances. There is nothing wrong with “doing well by doing good.”
If you want to be a tax-savvy philanthropist, consider using a time-honored strategy known as a “charitable remainder trust” (CRT). The Times-Herald Record of Middletown, NY, recently offered a crash course on CRTs in their article, “Protecting Your Future: Trust option for leaving assets to charity.”
A CRT allows you to give assets to charity in a manner that may provide an income stream that helps both you and your charity of choice. When the CRT is established, the assets you’ve chosen to donate are transferred to the trust. If appropriate, the charity you’ve chosen can be the trustee, and it can manage the assets. On the other hand, it is not uncommon for a community foundation or other professional fiduciary to serve as trustee. Either way, you and your chosen beneficiaries will receive an income stream for life or for a term of years that you choose when you create the CRT, and then the charity receives the remainder of what is left in the trust. You can choose a variety of payout options, depending on whether you want a fairly certain return, or whether you are willing to accept the risks–and benefits–of variations in the value of the trust assets. You can even reserve the option of switching charities or naming additional charities to benefit from your CRT after you are gone.
This strategy works best when the underlying assets are highly appreciated, have a low basis in the donor's hands, and do not produce significant income. The trustee of the CRT sells the donated assets and invests them to create an income stream for the donor. The trust principal is not reduced by capital gains tax on the proceeds of the sale. On the other hand, if the owner of the assets had simply sold them, there would be capital gains tax to pay, which would reduce the amount that the owner could invest in income-producing assets. With the greater amount of principal in the CRT, the donor can enjoy a larger income stream than would be the case if he or she opted against the CRT. In other words, by using a CRT, the donor benefits from with a bigger asset base for generating income than would be the case if the donor sold the assets, paid the tax, and invested the difference.
Of course, your family members may not be too happy to see the remaining CRT assets going to charity instead of to them when you die, but you could consider using a portion of the income stream from the CRT to purchase a life insurance policy which might replace the value of the assets that go to charity after your passing.
You can learn more about charitable trusts in the Charitable Planning Practice Center on our website, and in the September 2010 issue of our estate planning newsletters, “Charitable Opportunities.” (The link to the newsletter is a little slow, so please be patient.)