Charity Begins at Home

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CHARITABLE REMAINDER TRUSTS: 

“Charity begins at home” is an old adage we’ve heard over the years.  In 1969 charity became a part of the internal revenue code when it granted an itemized deduction for contributions to charities.  So, now charity can be as beneficial to the donor as to the donee.  One of the often overlooked concepts of giving is the Charitable Remainder Trust (CRT).

A CRT allows you to donate an appreciated asset such as stock, real estate, or business to a CRT and accomplish the following:

1. Take a charitable deduction for a portion of the market value of the donated asset. The amount depends in part on your age and the age of your spouse.
2. Sell the appreciated asset in the CRT and pay no capital gains tax.
3. Receive an income from the CRT for the remainder of your life and the life of your spouse.

What must the trust do with the assets at the second death of you and your spouse?  This is where charity comes in.  The ultimate beneficiary (remainder man) of the CRT must be a charity as defined in section 170(c) of the internal revenue code.  So, what is your favorite charity?  There are many worthwhile charities you can name.  These include your church, alma mater or even a private family foundation.

What about your heirs?  You just gave away an asset they may have inherited.  You can replace the value of the asset to your heirs with life insurance purchased through an irrevocable life insurance trust (ILIT).  If properly structured, the ILIT will pass the insurance proceeds to your heirs, in cash, and free from income and inheritance taxes.  This may be much better for them than inheriting the appreciated asset, paying inheritance tax and having to sell the asset to generate cash.

CRT’s may also help in other financial, retirement or estate planning strategies.  We mentioned the avoidance of capital gains tax when appreciated assets are sold after being contributed to a CRT.  This is certainly a primary benefit of a CRT.  A few others are:

1. A CRT produces another source of retirement income to supplement social security, pensions or required minimum distributions from your IRA, 401(k) or other defined contribution plans.
2. The charitable deduction, if not completely used in the year of the contribution, can be carried forward for 5 years or until completely used up thereby reducing income taxes in those years.
3. The charitable gift will be viewed differently for Medicaid five year look back purposes.  The value of the gift for Medicaid purposes will be discounted for the value of your remainder interest in the trust, which is your right to a life time income.
4. You will have reduced the value of your estate and, thereby, reduced the amount of your estate taxes.
5. You will have directed assets away from the federal or state governments to your designated favorite charity.
6. Most importantly, it will make you feel good.

This may be a topic that you want to explore further.  If so, please contact us and we will discuss the concept of a CHARITABLE REMAINDER TRUST with you in detail.  Remember, when you are gone the entity that has first rights to your assets is the government in the form of taxes unless you have done some planning and taken some steps to preserve your assets for your heirs or your favorite charity.