Charitable remainder trust benefits: tax break, income

Sharon Matney is vice president and trust officer with Empire Investment Management and Trust.

Estate planning can be very confusing to many individuals because it is not always limited to deciding who gets what at your death. Estate planning can include benefits to you during your lifetime. For instance, there are many individuals who need to consider tax planning as a part of the estate-planning process. In the estate and tax planning process you may want to consider the benefit of leaving a portion of your estate to charity.

Individuals frequently give to their church or favorite charity all the time. However, did you know you could establish a trust that would leave assets to your favorite charity or church at your death while allowing you to receive a tax deduction and increased income while living?

The type of trust that I am referring to is a charitable remainder trust. A charitable remainder trust works most effectively for individuals with highly appreciated assets that they want to donate to an organization. In giving to that organization with the use of a charitable remainder trust, you can secure a current tax break and maintain or gain a source of income. A charitable remainder trust, however, is irrevocable. Generally, once an irrevocable trust is signed, you cannot make any changes; however, you can retain the right to change the trustee if you become dissatisfied, and you may be able to change the charity (to another qualified charity) without losing the tax advantages.

When a charitable remainder trust is established you transfer appreciated assets into the trust. This removes those assets from your estate so, when you die, no estate taxes will be due on those particular assets. In addition, you get a current year tax deduction.

The trustee of the trust can then sell the asset without incurring any capital gains tax. The trustee will then reinvest the proceeds in other income-producing assets in order to pay you income for the remainder of your life. At your death, the remaining trust assets will go to the charity you have chosen.

If you would like to reverse who receives income and who receives the assets, you can create a charitable lead trust. Like a charitable remainder trust, you can receive a current income tax deduction and not have to incur capital gains tax on the highly appreciated assets. The charity is then the income beneficiary and would receive a steady stream of income during the owner's lifetime, and at the owner's death the named beneficiaries would receive the remaining assets of the charitable lead trust.

There are many aspects of estate planning and these are only two possibilities. Your financial advisor can help you find the option that works best for you.