Sometimes Gifting Can Yield More

Charitable gifting of a highly appreciated asset such as a stock or farmland often can yield positive income results for both the giver and the recipient charity. Many times, a family is reluctant to sell such an asset because of the capital gains tax that would be due when the asset is sold. The asset is typically a low yield or low income-producing property. The owners of these types of assets would like to convert them into an income for retirement, but are reluctant to do so because of adverse tax implications.

The above situation may have a remedy that is widely accepted and gaining in popularity – The Charitable Remainder Trust. The advantages are that the asset may be transferred to a trustee of a trust who can sell the property without the burden of paying capital gains tax, and the trustee then can provide an income payable quarterly, monthly or yearly to the maker of the trust, thus converting a low basis stock or piece of real estate into an income-producing asset. On top of this, the grantor, the person who makes the trust, can qualify for a charitable tax deduction for the current year in which the gift is given based on the giver’s life expectancy, the amount of the gift that will eventually pass to charity, the type and value of the assets, and the applicable federal rate. The charitable donation is normally limited to 30 percent of adjusted gross income, but can vary from 20 percent to 50 percent depending on the class of charity as defined by IRS regulations. If you cannot use the full deduction in one year, the deduction can be carried forward for up to five years. At the death of the grantor, or a successive life as determined by you, the remaining Trust assets go to your specified charity or charities.

The individuals making the trust, the grantors, have options as to their income choices.

They may select a percentage of the trust, in which case, the annual income received will be determined by the investment performance of the Trust. This type of charitable trust is called a Charitable Remainder Unitrust. The advantage is that additional funds may be later added to the trust. The assets may grow quickly if well managed since they grow tax-free. If certain assets, like land or closely held business stocks, are put into the trust, they may not be readily marketable, so income is difficult to pay. Special wording may be put in the Trust that would pay the lesser of the income earned so that any difference may be made up in a better year.

One might also opt for a guaranteed income. A trust providing a guaranteed income would be called a Charitable Remainder Annuity Trust; no matter how the Trust assets perform, a definite income will be paid. Many times, older clients will opt for this type of trust.

Trust income may be paid to the grantor, the grantor and spouse, or, after their death(s), to their children for their lives. The longer the Trust lasts; however, the lower will be the charitable tax deduction. It is possible to set up the Trust now, and delay taking the income until later. Hopefully, with good financial guidance, the trustee will see the growth in value of the Trust assets, which may mean significantly higher income to the grantors during their lives, and a greater remainder amount left to charity.

Since the remaining Trust assets will eventually go to charity, the question often arises as to how to replace your children’s inheritance. Fortunately, there is an easy way to do this. You may wish to apply a part of the income tax savings that would be generated due to your charitable tax donation to fund an irrevocable life insurance trust. Typically, this is accomplished with an inexpensive second to die policy, which is based on the lift expectancies of the grantor and spouse, or, another person. Since, actuarially, the life expectancy is spread over two lives, the premiums are much lower than they would be only on one person’s life. Because the irrevocable life insurance trust is the owner of the policy, the proceeds are removed from the grantor’s estate for estate tax purposes. The beneficiaries will receive the proceeds free of tax. Keep in mind that every dollar spend on premiums may qualify for the annual exclusion for gift taxes, and that every dollar of premium will buy several dollars of insurance. Thus, estate taxes may be avoided, and the proceeds will be free from probate and taxes.

Implementation of Charitable Remainder Trust results in creating a winner for everyone – grantor and spouse, their children, and the charity or charities they select. In summary, it is possible to convert a low yielding asset or piece of land that has appreciated in value into a lifetime income, avoid capital gains tax, receive a charitable income tax deduction, reduce or eliminate estate tax liability, leave more for the grantor’s children through a replacement insurance trust, and also benefit your favorite charity. Charitable trusts, in order to qualify for a qualified estate-planning attorney who has expertise in this area should draft all of these benefits. IRS regulations are very strict and must be clearly adhered to. Sound financial advice from your financial advisor should be sought.

Douglas R. Jackson is an attorney in private practice that emphasizes estate planning in the central Ohio area.

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