Readers of this estate planning blog probably assume that trusts are created with human beneficiaries in mind. But that’s not always the case, as in charitable giving.
One way to include charitable giving in an estate plan is through the creation of a charitable remainder trust. This type of trust is irrevocable. After the grantor transfers assets to it, he or she relinquishes control over the trust principal. Instead, the designated charity serves as the trustee and will be charged with the fiduciary duties of protecting and managing the trust. One of those duties will include making payments to the grantor, typically for the remainder of his or her lifetime. After the grantor’s passing, the trust ends and its assets are donated to the charity.
Notably, the grantor often can claim tax benefits from the charitable remainder trust during his or her lifetime. The federal income tax deduction can be spread over five years.
In addition, a charitable remainder trust can be a smart strategy for avoiding paying capital gains tax on appreciated assets. Ordinarily, capital gains tax is triggered when an appreciated asset is sold. However, if a charitable trust is funded with shares of stock, the trust can sell those securities without paying capital gains tax and reinvest the profit in other securities or assets. The grantor benefits because he or she will receive income from the trust, without ever having paid capital gains tax on the sale proceeds.
One caveat: A charity approved by the Internal Revenue Service might be a worthy recipient, yet lack the resources to hold a trustee accountable in the way that a human beneficiary might. In many states, including California, the state attorney general might enforce the purpose of a charitable trust if there is no human beneficiary to hold the trustee accountable.
Source: FindLaw, “Tax Incentives for a Charitable Remainder Trust,” copyright 2014, Thomson Reuters