Philanthropic contributions not only serve the betterment of society, but they can also yield financial benefits in terms of reducing tax obligations. Charitable trusts in particular are invaluable when it comes to reducing your estate and minimizing estate taxes. In addition, they can provide other benefits during your lifetime.
CLTs and CRTs
First off, let’s take a look a the two types of charitable trusts you can create: charitable lead trusts (CLT) and charitable remainder trusts (CRT).
- CLT: With a charitable lead trust, regular payouts are made first to charities, and after a certain period of time, the remainder of the trust is paid out to a non-charitable trust beneficiary.
- CRT: A charitable remainder trust works in the opposite direction. Payouts are made to non-charitable beneficiaries until a designated time limit is reached, at which point the remainder of the assets in the trust are donated to charity.
Each type of trust has its own applications, and those can be beneficial in various ways both during your lifetime as well as after.
Reduce Estate Taxes
The main tax benefit of donating through a charitable trust is it’s a way to reduce your estate (and estate tax obligations) without incurring gift taxes or other tax liabilities. Funding a trust effectively removes assets from your estate while also allowing you and your beneficiaries to reap income from interest. Also, in the case of a CLT, a contribution made to the trust upon death will qualify the donor for an estate tax deduction.
Avoid Capital Gains Taxes
CRTs in particular are a highly effective way to preserve the value of appreciated property. They can be funded with highly appreciated assets without capital gain, allowing both your beneficiaries and charities to receive the full value of your assets since the amount isn’t reduced by capital gains taxes.
Income Tax Deductions
CLTs can be set up in order to incur large tax deductions from charitable donations year after year, not only making them useful for minimizing estate taxes, but also annual income taxes. A CRT may also yield these benefits if you take a partial income tax deduction based on the amount that will be donated once the trust’s time limit is reached.
Protection from Creditors
If you or your beneficiaries are faced with creditors, a charitable trust can help protect your assets from seizure. Assets gifted into the trust are removed from your estate and are—in the eyes of the law—no longer your property. As such, they cannot be seized by creditors and are preserved for charity.
Charitable trusts, particularly CRTs, can generate wealth by selling assets that don’t normally produce income while preserving the remainder for charity. Since these trusts are tax exempt, they can be a highly efficient way to generate wealth while you are alive while also yielding the other benefits mentioned above.
Creating a Charitable Trust
To yield any of these benefits, your trust must be constructed properly, and that requires extensive knowledge of the laws surrounding estate planning, taxation, and asset transfers. To incorporate a charitable trust fund into your estate plan, contact the attorneys at Hart David Carson, LLP, today.