Often in estate planning, families will have two goals that can seem difficult to rectify. First, they want to ensure that they can use the money that they have acquired over their lifetime to do good for others. This may mean donating to a school they attended, a favorite non-profit, or a cause that is near and dear.

Second, they want to minimize the taxes taken out of the money they have worked hard to acquire and ensure that the most possible is available for their heirs, friends, and the charitable causes that are important to them.

Estate planning offers different vehicles for addressing different aspects of these two goals, but one type of estate planning mechanism can work particularly well for families handling this type of a challenge: charitable remainder trusts.

How Do Charitable Remainder Trusts Work in Manhattan Beach?

Charitable remainder trusts are a type of trust that is set up so that certain of your assets can go to charity after you pass away. However, rather than simply bequeathing the assets in your will, a trust is set up in advance to hold those assets. During your lifetime you can receive the benefits of those assets and after you pass, they will be given over to charity.

Charity remainder trusts have to be thought about very carefully because they are irrevocable. What this means is that once the trust is set up and control is handed over to a third party, you cannot claw the assets back or try to undo the trust. It is simply out of your control at that point.

How a charitable remainder trust works is:

  • The person with the assets must set up the trust with the assistance of a trusts and estates attorney.
  • The assets at issue are then transferred into the trust.
  • A charity is selected as the trustee of the trust.
  • The charity must be one that is registered with the Internal Revenue Service.
  • The charity is then placed in charge of the trust and handles it assets.

Depending on the assets placed in the trust, the charity may manage investments, purchase property, or do whatever else needs to be done so that the assets grow as much as possible.

As the assets generate income, that income can be paid to you, or to another beneficiary that you designate. Income can be paid for a set period of time or for a beneficiary’s entire life. Once the time is up, or the beneficiary passes away, the assets in the trust go permanently to the charity.

How Does a Charitable Remainder Trust Benefit You?

While charitable remainder trusts certainly create a feeling of good will and pride because they allow you to contribute to a cause that you believe in, they also have serious tax advantages.

First, an individual or a couple who donates to charity can take an income tax deduction, spread out over five years, for the amount of the gift that is placed into the trust. It is important to realize that while you can deduct the value of your gift, you cannot simultaneously deduct the full value and also benefit from the income you receive for that gift. Instead, the income is deducted from the overall value of the gift.

Second, a charitable remainder trust also serves to reduce the overall value of your estate, and can help you to avoid estate tax. Once assets from your estate are placed into a charitable remainder trust, they are no longer part of your estate. This is because you no longer have control over them or the ability to undo the trust. If a charitable gift is particularly large, it can serve to help you avoid estate tax.

Third, a charitable remainder trust also avoids capital gains tax. Normally, when you have investments that have increased in value over time, you must pay taxes on those increases when you sell or transfer those assets.

So, for example, if your stock increases in value from $50,000 to $100,000, you will owe tax on that $50,000 increase. If that stock is sold after being placed in a charitable remainder trust, no tax has to be paid on the increase in value of the stock, despite the fact that you can continue to receive income from that stock sale as a beneficiary of the trust.

When Does a Charitable Remainder Trust Make Sense?

While the advantages of a charitable remainder trust can be significant, they really only make sense when dealing with large amounts of assets that would normally require a significant tax payment, and which can continue to garner you income while in a trust.

If, by contrast, you are thinking of making smaller gifts to a charity of your choice – perhaps $500 or $10,000 a year, it may not make much sense to set up a charitable remainder trust. First, depending on where that money comes from, you may not actually save much in taxes by putting it in a trust.

Second, if the amount is small, it is unlikely to garner you significant income in the trust. Third, in exchange for these minimal benefits, you are giving up control over that money and can no longer use it in the event of an emergency . This can be a significant risk depending on your financial situation.

Manhattan Beach Attorneys Structuring Your Assets to Benefit Charity

If you hope to give a significant amount of your assets to charity upon your death, a charitable remainder trust can be an excellent vehicle for doing so while still allowing you, or a third party to benefit from that money while alive.  At the Ledbetter Law Firm, APC, our estate planning attorneys can work with you to create a charitable remainder trust and answer any questions that you might have. We work with individuals with a wide range of charitable interests to help them meet their goals. For more information, contact us online or at (310) 321 – 4198.