Charitable Giving Through Prepared Trusts
You Can’t Take it With You (But you can control its course)
Bill Gates famously noted that philanthropy should be voluntary. We are all philanthropists; we choose to be either voluntary philanthropists and direct our assets to our favorite charities, causes and people, or to be involuntary philanthropists and pay taxes for distribution through government programs. We would like to make the case that voluntary philanthropy is the way to go.
Our government recognizes that individuals are in the best position to foster effective giving. It encourages charitable giving by offering tax breaks and other incentives, and this affords a savvy planner some wonderful opportunities to lower taxes, grow wealth and also teach and provide for family, all while giving to causes which are important to him or her. Here are some ways how:
Charitable Remainder Trust
Suppose you have owned a business for many years which started small, but through your hard work and good planning has grown into a profitable and successful corporation. Your shares of the company have increased exponentially in value, and are your major asset. You would like to sell at least some of the stock in order to be able to retire, but there is going to be a massive capital gains tax due on sale. A solution is to set up what is called a charitable remainder trust (“CRT”). You can contribute your stock to the CRT and take an immediate tax deduction. The CRT can then sell the stock with no capital gains consequences. The income from the sale of the assets is distributed to you in regular intervals, providing for your retirement. When you pass away the income payments can continue to your beneficiaries, up to the death of the last person who was alive and named as a beneficiary of the trust. At the end of the trust term the trust assets are dispersed to the charity or charities you have specified. Thus a CRT shelters what you would have paid in income and capital gains tax to provide for you, your children, grandchildren and charity. It’s a big win all the way around.
Charitable Lead Trust
This type of trust directs funds first to a charity for a period of years, and then to named beneficiaries. A charitable lead trust (“CLT”), though opposite in some ways from a CRT, is just as effective in distributing your wealth in a manner which benefits everyone. Let’s say that your and your spouse have made quite a lot of money during your lifetime, and in spite of regular gifts to charity, you are still facing steep estate taxes upon your death because your estate will be over the estate and gift tax unified credit amount, which for married couples is currently at $10.9 million. Anything beyond will be taxed at 40%. Depending on who is in power in Washington, the unified credit amount could drop way down, and the estate tax amount could spike up to 65%. With the creation of a CLT, the amount subject to estate tax can be directed to a charitable fund, which holds the principal for a period specified by you, and distributes the income to charities named by you. At the end of the specified time, the funds are distributed to the beneficiaries chosen by you, which can be children or grandchildren. This strategy can substantially reduce or eliminate estate tax, provide immediate funds for favorite charities, and grow the principal to ultimately give more to beneficiaries that would have initially been available.
If teaching your children how to be charitably minded is important to you, you might consider setting up a family foundation. Traditionally, the family foundation is created as a private foundation, which provides the most control for the family. However, a private foundation must strictly abide IRS rules for governance and distributions. Alternatively, a family foundation can utilize a donor advised fund to donate to charity. Gifting through a private foundation does not receive as large a tax break as does gifting through a donor advised fund, but there are other benefits to a private foundation, such as more control and direction by the family, allowing for an increase in teaching opportunities and family unity. A family foundation can be director of the funds in either a CRT or a CLT.
These are just a few of the many ways to be a voluntary philanthropist. We suggest that you begin your planning now to ensure that your hard earned assets will be used to enhance your life, your beneficiaries’ lives, and the recipients of your favorite causes. You can’t take it with you, but directing it efficiently to the causes you care about is a comforting close second.