Trust can aid charity, retain income

Money Talk

Your Money

April 24, 2005|By MATT LUBANKO

Can you explain the basic inner workings of a charitable remainder trust? Can you also explain why someone might be interested in setting up such a trust?

- H.C., Hartford, Conn.

Charitable remainder trusts cater to people with one wish and one worry. They wish to leave their money to charity when they die. But they worry about their money running out before they die.

By setting up a charitable remainder trust, you can plan to give away money after you die and receive a stream of income while you live.

The trust attains this end by naming two beneficiaries, those who would receive income generated by a valuable asset such as shares of stock, and those named to receive a gift after the death of the property owner, or co-owners.

Assembling and maintaining a charitable remainder trust is not cheap or easy. It requires the expertise of an estate planning lawyer. It sometimes requires professional money managers, if only to ensure that the trust complies with IRS regulations. A charitable remainder trust also is irrevocable.

"It's a tool generally used by high-net-worth individuals with a philanthropic bent," said Mark Munson, a vice president and senior wealth planner with PNC Advisors in Pittsburgh.

This tool can bestow several benefits on those who put it to use, experts said. Let's assume the tax-free "exclusion" (or the portion that escapes federal estate taxes) remains forever fixed at $1.5 million, and your estate is worth about $3 million. You hold General Electric stock worth $1.6 million, which you bought for just $10,000 in 1952. Your current income is not enough to meet your long-term needs, and you'd like to leave a generous gift to your church when you die.

By putting these GE shares into a charitable remainder trust, you can solve five problems at once:

Reduce the value of your estate so it falls below the $1.5 million threshold at which federal estate taxes kick in.

Reduce, defer and possibly eliminate capital gains generated by the sale of GE stock.

Take an upfront tax deduction for this gift, based on its expected future value.

Generate more income from a stock with a current dividend yield of just 2.5 percent.

Satisfy your wishes to leave a generous gift to the charity (or charities) of your choice after you die.

Often, "charitable remainder trusts are built around assets that do not produce much current income, yet have sizable embedded capital gains," said Hugh Magill, head of the personal trust department at Northern Trust Corp. in Chicago.

In the hypothetical case of GE shares worth $1.6 million, the owners might receive $65,000 a year in income. That yearly payout from $1.6 million would be based on two factors: the so-called "federal rate" of interest and the current age and life expectancy of the owners.

Older people, with shorter life expectancies, tend to receive higher yearly incomes from charitable remainder trusts. Charitable remainder trusts also throw off more income when interest rates are fairly high, PNC's Munson said.

Intermediate-term interest rates, though they have risen from the rock bottom of June 2003, are relatively low.

By creating a tax shelter for your appreciated stock, trust companies can sell the shares and not pay capital gains taxes. They take a fee for their investment management service, which usually starts at 1 percent of an asset's value.

Matthew Lubanko is a Your Money columnist. E-mail him at

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