Charity often begins with avoiding the tax man.
The charitable remainder trust is a vehicle considered by many mature Americans seeking an edge. First of all, it permits individuals to make a significant contribution to the charity of their choice. Secondly, it allows them to sell highly appreciated assets to avoid capital gains taxes, get a charitable tax deduction, receive income during their lifetime and efficiently transfer their estate 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 55 to 75, and the usual assets placed in the trust are stocks, real estate and businesses. Setup can require legal fees of $1,000 to $4,000 and accounting costs of $500 to $2,000. The trusts are put together through attorneys, financial planners, charities and charitable trust design firms.
"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, based in New York and Palm Beach, Fla.
"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 sale of the asset can be reinvested inside the trust to produce income. The individual has the right to receive income from the trust during his lifetime.
"The charitable remainder trust didn't gain popularity until the 1986 tax act basically eliminated all of the tax-favored transactions and made it the only game in town," said Frank Terzolo, president of the Scottsdale, Ariz.-based Ameritrust Network, which designs charitable remainder trusts.
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 of 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 at the time the trust is set up. The amount is 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 from the trust.
Individuals can provide to heirs an amount equal to that going to the charity upon their death. One way to do this 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 income generated by the trust.
Another way to provide for heirs is to have the trust continue to pay out income past the death of the individual who set up the trust, to a maximum of 20 years. Both methods result in lower estate taxes being paid upon the death of the person setting up the trust.