If you want to create the best possible impact with your generosity, giving money to charity may not be as straightforward as you initially thought. Instead of simply donating cash, charitable vehicles like donor-advised funds and charitable gift trusts make your gift go much farther.
A trust attorney can help you maximize your giving with a charitable gift trust while minimizing your tax liability. Not only does this vehicle enable you to give to a charity that holds personal meaning, but it also enables you to give generously to loved ones under the right circumstances.
Is this the right move for your financial future or even your present tax situation? Here is what you need to know to give generously and wisely.
What is a Charitable Gift Trust?
When you want your legacy to last for generations to come, managing your wealth is a key aspect for your beneficiaries. A charitable trust, sometimes also referred to as a charitable gift trust, could be the perfect solution for generous donors. With this type of trust, you can ensure that beneficiaries receive regular payouts while also allocating funds toward a charity that is near and dear to your heart.
Charitable gift trusts come in all shapes and sizes. Perhaps the most common is the charitable remainder trust (CRT) which allows you to issue payments to your beneficiaries followed by a sizable donation to charity. Depending on the specific type of CRT, they may receive the same payment annually or it may vary as funds are depleted decades down the road.
A charitable lead trust offers the opposite form of giving. Instead of giving to beneficiaries first and charity last, a CLT enables you to give the other way around. Charities get the first dibs on the funds you generously set aside and beneficiaries receive the remainder.
Benefits of Charitable Gift Trusts
Leaving a legacy with a charitable gift trust is significant to most donors. When you allocate funds to a charitable remainder trust, you also tap into some core benefits that further enhance a generous gift.
Here are a few benefits you will receive when setting up a charitable gift trust.
- Tax advantages: The main draw for a CRT is that it can offset your tax bill at the end of the fiscal year. It removes the money or assets from your taxable estate while allowing you to skirt capital gains tax that would ordinarily infringe on your ability to reinvest the full value of the asset. If you decide that you would rather give cash, you can deduct up to 60 percent of your adjusted gross income for the year.
- Income streams: Charitable giving may not be your sole focus with your wealth. With one of these trusts, you can also arrange for a steady income stream for beneficiaries (or even yourself). While the distributions may be taxed, they can be especially helpful for setting up the next generation or ensuring that you have income in retirement to cover your care.
- Avoid probate: Eventually, we all have to come to terms with death. When you pass, do you want your legacy to be tied up in probate court or do you want your loved ones to receive their portion of the inheritance quickly? One significant benefit of using a trust in estate planning is that trusts can skip probate. As a bonus, this means that the final gift given is not on public record which could be good for privacy purposes.
- Asset protection: Worried that a beneficiary might get into legal trouble or run up a tremendous debt? A charitable remainder trust is shielded from creditors no matter what happens to you or your finances. Even your beneficiaries cannot lose the trust because it is irrevocable and the terms of the agreement are unalterable.
Of course, the main draw for structuring a charitable gift trust is not just the wealth of tax benefits, but also the freedom and flexibility needed to donate to causes that mean a lot to you. The above benefits are nice to have, but at the end of the day, it is also important that your wealth has a sizable impact on the people and community around you.
When setting up a CRT, make sure you understand the 10 percent rule which states that you must give at least this percentage to charity based on the initial funding of the trust. You do not have to give right away (unless you have a CLT). Instead, donations may be made years down the road when the rest of the trust is depleted. We are currently setting up these trusts with expected life spans of over 53 years! That’s a lot of tax-free compounding.
This rule exists to ensure that you hold up your end of the bargain: The IRS gives you a significant tax advantage and you make a significant donation to a qualified charity. Overall, it is a win-win situation for all involved when executed properly.
Set Up Your Charitable Gift Trust Today
If you think a charitable gift trust could be the right vehicle for your estate, the next step is to contact experts who can legally structure your trust to receive the maximum benefit. At Magellan, we provide comprehensive estate, financial, legal, and tax planning so that you can use a charitable remainder trust to the fullest. What's more, and quite rare today, is that we coordinate all these parties and bring them all around the table for your best results.
From the initial setup to the ongoing financial management, we provide every service you need. Reach out to us today to learn more about how we can help you at competitive rates!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.