In today’s post, we’ll conclude our discussion of charitable remainder trusts, which are irrevocable trusts that not only facilitate philanthropic gestures, but also provide a steady income stream and considerable tax savings.
Indeed, as we discussed last time, the trustor (i.e., trust creator) or someone of their choosing will receive either percentage payments or annuity payments for a predetermined number of years or up until the passing of the trustor. As for the considerable tax savings, this is typically realized in three distinct ways.
What’s the first way in which tax savings can be realized via a charitable remainder trust?
The first — and perhaps most obvious — way in which tax savings can be realized via a charitable remainder trust is that it can serve to lower your estate tax bill. That’s because upon your passing, the property placed in the trust will go directly to the charity, such that it won’t be included in your taxable estate.
What’s the second way in which tax savings can be realized via a charitable remainder trust?
The second way in which tax savings can be realized via a charitable remainder trust is that they enable otherwise non-income producing assets to be transformed into a steady source of tax-free cash payments.
For example, consider if you who owned 1,000 shares of stock that have seen their value jump from $10 per share to $100 per share over time. While you could sell the stock and realize a substantial profit, you would not be able to escape the capital gains tax.
If the stock is donated to a charitable remainder trust, however, the charity could sell the $100,000 in stocks tax-free, invest the money and then proceed to make regular payments to you as dictated by the terms of the charitable remainder trust.
What’s the third way in which tax savings can be realized via a charitable remainder trust?
The third way in which tax savings can be realized via a charitable remainder trust is that the rules are set up in such a way that you, the trustor, are permitted to take an income tax deduction spread out over a five-year period.
It’s important to understand, however, that this is not a dollar-for-dollar deduction. Rather, the Internal Revenue Service treats the deduction as the amount originally donated minus the amount expected to be received in interest payments over the course of a lifetime.
If you would like to understand more about your options as they relate to creating a trust, please consider speaking with an experienced legal professional who can answer your questions and explain the law.