Charity often begins with avoiding the tax man.
The charitable remainder trust is a vehicle considered by many mature Americans seeking an edge as they wrap up their tax year. First, it lets individuals make significant contributions to the charities they choose. Second, it lets them sell highly-appreciated assets to avoid capital gains taxes, get current charitable tax deductions, receive income during their lifetimes and efficiently transfer estates to heirs.
Such trusts are definitely not a household word.
"I hadn't heard of a charitable remainder trust until I did one last year, but I had big capital gains from a utility stock and rental property," said William Cherin, 64, of Colfax, Calif. "I didn't have to pay tax on them at my age, and I also got an advantage through the charitable deduction."
Individuals typically are older, age 55 to 75, and the usual assets placed in the trust are stocks, real estate and businesses. Set-up can require legal fees up to $4,000 and accounting costs up to $2,000. The trusts are put together through attorneys, financial planners, charities and charitable trust designers.
"The charitable remainder trust is attractive to anyone who intends to leave money to their favorite institution, museum or school in their will," explained William Zabel, senior partner with the law firm of Schulte Rother & Zabel.
"You transfer what preferably is a highly appreciated asset, such as a stock or real estate, and I have also done trusts with violins and paintings, basically anything one is willing to sell."
A charitable remainder trust is an IRS qualified trust, so when a highly appreciated asset is sold inside the trust, capital gains taxes needn't be paid. Proceeds from assets sales can be reinvested inside the trust to produce income and the individual can receive it during his lifetime.
"The charitable remainder trust didn't gain popularity until the Tax Act of 1986 basically eliminated all of the tax-favored transactions and made it the only game in town," said Frank Terzolo, president of Ameritrust Network in Scottsdale, Ariz.
Proceeds should be reinvested conservatively, experts agree, typically in stocks, mutual funds, government securities and certificates of deposit. Upon the death of the individual, or both spouses if married, the value of the trust is distributed to the charity. Because a charity eventually gets the value of the asset placed in a charitable remainder trust, the individual gets a current charitable tax deduction when the trust is set up based on the amount of the asset being placed in the trust, the age of the individual and the amount of income being distributed to the individual.
"No one actually comes in asking for a charitable remainder trust, but the issue arises when someone comes in with a need to be met," noted Allen Ostrofe, president of Ostrofe Financial Consultants in Grass Valley, Calif. "These people already have rejected as unworkable the more obvious solutions designed either to increase income or to reduce current taxes, capital gain or real estate taxes."
Individuals can provide to heirs an amount equal to that going to the charity upon their death. One way is to fund an irrevocable life insurance trust. The individual buys a life insurance policy on his life for the same amount as the value of assets being placed in the charitable remainder trust, with the premium paid by a portion of the income it generates.