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Charitable Trusts

Charities help those who are not as fortunate. Charities also serve another purpose: they help Americans reduce their tax bill. This vehicle allows taxpayers to reduce estate taxes, eliminate capital gains, claim an income tax deduction, and benefit charities instead of the IRS.

This type of trust is technically a Charitable Uni-Trust, but is more commonly known as a Charitable Remainder Trust. Charitable Remainder Trusts do not pay any capital gains taxes. These taxes can range from 10% to 20% of an asset's growth in value. For this reason, charitable trusts are ideal for assets like stocks or property with a low cost basis but high appreciated value.

Charitable Remainder Trusts are irrevocable trusts that actually provide for and maintain two sets of beneficiaries. The first set are the income beneficiaries (you and, if married, a spouse).

Income beneficiaries receive a set percentage of income for your lifetime from the trust. The second set of beneficiaries are the charities you name. They receive the principal of the trust after the income beneficiaries pass away.

While a Charitable Remainder Trust is an irrevocable trust, you and your spouse may change the charitable beneficiaries at any time. Under certain conditions, you may even serve as trustees of the CRT. As trustees, you can maintain full investment control of the assets inside the CRT.

Funding a Charitable Remainder Trust with highly-appreciated assets (like real estate) allows you to sell those assets without paying any capital gains taxes. Since CRTs have a charitable intent and do not have to pay capital gains, the full value of any assets transfers to the trust (and thus, to your family and favorite charity).

The amount of income to come out of the Charitable Remainder Trust depends upon the payout percentage that you choose, and the amount of income your assets generate while inside the charitable trust.

The IRS states that, at a very minimum, the Charitable Remainder Trust must distribute at least 5% of the net fair market value of its assets. If you don't need the income one year, you may elect to defer income through a "makeup provision." It must eventually equal 5% to be considered valid by the IRS.

When setting the payout percentage, you must know, the higher it is, the lower your charitable income tax deduction. Considering market conditions and the possibility that taking out too much may reduce the principal inside the trust, you should probably not receive income of more than 10% each year.