Americans are generous people. We will give over $375 billion to charitable organizations in 2013, according to a January 2013 forecast by Atlas of Giving.
No matter what cause you choose to support, there are many ways to structure your giving. Selecting the most appropriate method requires you to consider many factors such as your income needs and important tax issues.
Charitable Trusts: Serve Dual Purposes
Charitable trusts such as charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are among the most popular giving instruments. Charitable trusts serve the dual purposes of providing for charity as well as noncharitable beneficiaries such as you, your spouse or children. When a charitable trust is used, the gift to charity can also be referred to as a split-interest gift because it is split between a charitable beneficiary and a noncharitable beneficiary.
CRTs--A Closer Look
First and foremost, a CRT is a tax-exempt entity. So, while it can be funded with a variety of assets, including stocks, bonds, mutual funds and real estate, because of its tax-exempt status, a CRT can be especially effective for individuals who want to sell highly appreciated assets without incurring capital gains taxes.
Assets placed in a CRT provide a stream of income to you, your spouse or other beneficiaries for a specific period of time (i.e., your lifetime or a term not to exceed 20 years). At the end of that period, the remaining assets are distributed to your charity of choice.
You can claim an immediate tax deduction for your donation even though the charity selected to receive the remainder interest in the trust will not receive the monies until some future date. And although the remaining CRT assets are distributed to the charity gift- and estate-tax free, you or other noncharitable beneficiaries will owe tax on the income you receive from the trust.
Key Benefits at a Glance
Some key benefits of CRTs include:
Avoiding immediate capital gains tax on the sale of appreciated assets.
Increasing spendable income.
Receiving an immediate charitable income tax deduction based on the present value of the trust’s remainder interest.
Receiving future estate tax deductions.
Making a substantial future contribution to charity.
Two Payout Methods
Charitable remainder trusts use one of two payment methods--annuity payments or unitrust payments.
An annuity trust pays a fixed-dollar amount at least annually. A unitrust CRT pays a fixed percentage of the current fair market value of the trust assets, which are valued annually. Generally, the annuity method is considered less risky because payments are fixed and will not fluctuate with market conditions. The downside of that “safety” is that the income generated may not keep pace with inflation--a key consideration if the money is earmarked to fund retirement.
CRT unitrust income will ebb and flow with the value of the underlying investments--income will increase when the market rises and decline when the market recedes. For many, this makes the unitrust method a riskier choice. But it also offers a better chance of keeping income payments ahead of inflation.
Reversal of Fortune--The CLT
A close relative of the CRT, a charitable lead trust (CLT) distributes income in reverse order: first to the designated charity for a period of years, after which the remaining assets are paid out to you, your spouse or other heirs.
A CLT is often the tool of choice for individuals with:
Assets that have a high potential for future appreciation.
Heirs who are minors or otherwise not ready to assume full control of assets.
Rachel Wright can be contacted at Rachel.Wright@morganstanley.com .
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.
Article by Wealth Management Systems, Inc. and provided courtesy of Morgan Stanley Financial Advisor.
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