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The Advantages of Charitable Trusts

by Christine S. Fahlund

Do you have a significant college reunion that’s inspiring you to make a large gift? Perhaps there is a capital campaign for your favorite cause. These are the kinds of giving opportunities that should have you considering a charitable trust. For example, a charitable remainder trust allows you to make a major gift while still affording you the security of a reliable income stream—the ultimate win-win.

In terms of tax benefits and structure, a charitable trust (in the form of either a remainder trust or a lead trust), differs from other types of giving, such as outright gifts or bequests and donor-advised funds.

With a charitable remainder trust, you generally designate how you would like to receive income during your lifetime with the charities of your choice getting the “remainder” at your death. Your options are to take a fixed amount as an annuity (an annuity trust) or to take a percentage of the trust’s assets annually (a unitrust).

You also get to choose the duration of the trust—maybe 10 years, or perhaps the duration of your lifetime and your spouse’s lifetime. These choices will affect the IRS’s determination of the “remainder interest” that the charity will be likely to receive, which dictates the charitable deduction you will receive when you fund your trust.

A Tool for Diversifying Large Holdings

Another advantage of the charitable remainder trust is that if you have a concentrated position in one or more stocks, you can diversify your portfolio without incurring capital gains taxes.

Let’s say you bought or received a large amount of a stock 20 years ago and its price has since appreciated from $20 a share to $80. You establish a $200,000 trust, funded by your stock. And once the stocks are in the trust, they are sold by the trustee. You do not incur any capital gains taxes because such transactions are not taxed when the trust qualifies as a charitable trust. Subsequently, the trustee creates a well-diversified portfolio that provides a source of lifetime income for you as well as a substantial remainder for the charity.

Income for Someone Else

Should your goal be to provide lifetime income for someone else if you predecease (pass before) that person (perhaps a sibling), you could create a testamentary charitable remainder trust. Your estate rather than you would receive the charitable tax deduction at the time the trust is funded, resulting potentially in a lower estate tax bill and benefits for your sibling and a favorite charity all at the same time.

Charitable Lead Trusts

In the charitable lead trust, it is the charity that “leads” —as the primary beneficiary of distributions from the trust for a period of time that is determined when the trust agreement is drafted. You or your estate receives a charitable income tax deduction at the time the trust is funded.

Like the remainder trust, a charitable lead trust can be beneficial if you own a large concentration of a particular security. However, in this type of trust your goal is not income or diversification. Instead, the lead trust allows you to retain the stock in the trust, because you believe that it has the potential to appreciate significantly. A charitable lead trust enables you to get the stock out of your estate at a relatively low price and ultimately transfer it to your heirs. You can also use the testamentary model in a lead trust.

With a lead trust, the donor is betting that when the assets in the trust are to be distributed to heirs, the stock remaining in the trust will have a much higher value than that used by the IRS at the trust’s inception to calculate the estimated remainder amount. Regardless of how much the stock in the trust might have been appreciated, there will be no additional estate taxes owed when the assets revert to the heirs.

A Charitable Gift

Given the complexity of establishing and maintaining a charitable trust, it is wise to consult a professional, such as an estate planning attorney, to learn more. When considering a charitable trust, the key part of this concept is “charitable.” While all types of gifts to charity result in tax benefits, a “gift” is still about you “giving.” You will own fewer assets and the charity will own more. Regardless of which type of trust you choose, your long-term objective needs to be two-fold: meeting your financial needs and enjoying a deeper, more rewarding relationship with one or more of your favorite charities.

—Christine Fahlund, Ph.D., vice president, T. Rowe Price Group, Inc.; senior financial planner

Christine S. Fahlund , Ph.D. and CFP, is a senior financial planner and vice president of T. Rowe Price Group, an investment management firm based in Baltimore, Maryland.


Discussion

James Merchant from MA posted about 1 year ago:

I would like to see the ETF substitutes for the Mutual Funds that you use. I prefer using ETF's because they are easier to trade, and their fees tend to be less.


Harold Helson from MA posted 12 months ago:

Interesting topic. Can the trusts be revocable should hard financial times ensue?


Ken Milder from NM posted 11 months ago:

Harold raises a good question. While revocable trusts exists, the charitable tax advantages of these vehicles might make them irrevocable. I know that a portion (I believe 10% minimum) of a Charitable Remainder Unitrust must be irrevocable. The 10% minimum is based on the initial fair market value of the assets transferred into the trust.


Charles Kaminski from WA posted 11 months ago:

Potential issue with respect to selling concentrated, highly appreciated positions in order to reposition. Trust may have to pay taxes which reduces corpus.


Victor Bradford from CO posted 11 months ago:

--Thank you for your generosity in providing this article to us all.
--We investigated this option and found the received interest rate from a charity compares very favorably with that for a conventional annuity.
--Please discuss your plans with your charity's donor department. Ours gave several options, including a life insurance policy, annuities, and a simple gift. Our charity, for example, encouraged us to simply gift appreciated securities because they felt it involved less uncertainty and fees (and gave us a greater tax deduction). I might consider that option if you anticipate adequate pension income.
--I would also encourage you to remember that future tax policy may be changed and today's charitable tax policy may be significantly more favorable (and is more certain) than future policies. A deduction in the hand today may be worth more than a fraction of that deduction in the future.


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