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Charitable trusts provide tax advantages

Posted online

by Bill Garton

for the Business Journal

Some things simply go together, like milk and cookies, baseball and summer, success and taxes .... was it just me, or does that last combination bring your blood to a boil and kill the tranquility of the moment? It is a fact that if we are successful in business, taxes will follow.

We also might as well face it: You may not currently feel motivated toward charitable giving, but if you pay taxes you are a philanthropist albeit, an involuntary philanthropist.

"Whoa Nellie," you say. "I am in control of my own destiny and financial future." If that is the case, why are so few people taking advantage of one of the greatest "gifts" business owners and individuals of medium to high net worth are given?

Yes, it just so happens we are all giving to that "big charity in the east," called Washington. If you are in business or are someone of high net worth and feel that estate planning isn't necessary because we all should pay our fair share, rest assured you will pay dearly!

On the other hand, if you feel your life's work means something, and that every dollar potentially has a lasting impact on our society, or you simply don't trust Washington to decide which causes are best or ethically correct, or if you understand that the tax code allows for strategies to diminish or control where your money goes, then you might want to read on.

The law allows for you to control where your money goes, even after death, through the use of charitable trusts and other estate-planning techniques. Yet many miss the opportunity to avoid substantial estate and capital gains taxes due to lack of knowledge of these valuable tools.

Charitable giving for many individuals is driven by moral or religious convictions. For others it may be a way to pay back a debt they feel they owe society or an organization. For the savvy individual or business owner, using charitable techniques simply makes good financial sense and potentially will save hundreds of thousands, possibly millions, of dollars in estate or capital gains taxes.

Any business owner considering the transfer or sale of a closely held business, or the individual considering the sale of highly appreciated real estate, stocks or other assets would be well served to explore the possibilities of charitable trusts.

In most instances, the subsequent gift and sale through the charitable trust will provide the donor with more money than an outright sale. This occurs through the preferred status that a charitable trust enjoys, which is that it doesn't pay capital gains taxes.

The gift itself will generate a current deduction, amounting to income flow to the donor. The proceeds of the sale of the business, real estate or highly appreciated asset will be available to provide income to the donor. If the donor doesn't need the income, then it could be used for the benefit of others or for the benefit of the charity. Remember the charity must eventually get something from the trust.

In most scenarios, the actual money available or income flow to the donor will be substantially more than an outright sale without the use of the charitable trust.

How is the current deduction on income taxes for the gift determined? In simple terms, it is based on a formula of 30 percent to 50 percent of the value of the remainder interest of the trust.

One other significant feature is that in many cases, this property or asset can be protected from claims of creditors or substantial judgments once inside the trust. The donor in some instances can even be the trustee.

It seems reasonable that cash is the perfect gift. But does it make sense to give cash when you have other more highly appreciated assets that you will pay taxes on if you sell?

For example, it is usually better to give highly appreciated stock and let the charitable trust sell it than to give cash. In some situations, the individual can even buy the stock back, thereby raising the cost basis for future transfer to their own family or sale to others.

This is also a very popular concept for the person who has accumulated a substantial qualified retirement plan, typically $1 million plus, and wants to avoid the "triple tax."

The so-called triple tax involves the ordinary income tax paid on distributions, plus the 15 percent excise tax paid on excess accumulations that are distributed. The third tax comes if death occurs before the money is spent down, a potential 55 percent estate tax. Do the math on those three taxes. Ouch!

Doesn't it make sense for the successful business owner or individual to explore ways of preparing to protect his life's work to leave a lasting legacy for future generations and causes he believes in?

This "social capital" can create more wealth for the donor family and its future generations with less taxes; create more money for charitable causes which will impact the lives of potentially hundreds of people touched by these funds; and most importantly, bring greater meaning to the lives of future generations of the donor family.

As one man told me, "I don't want to leave a legacy that makes my children and grandchildren worthless. I want their lives to be full of meaning, and this charitable money will give them greater purpose as they decide which causes are most worthy."

Like baseball and summer, charitable trusts can fit like a glove with business and family estate tax planning. It is the ultimate triple play: tax reduction, wealth preservation and funding for the social causes you believe in.

(Bill Garton is a certified family business specialist working in the areas of business succession, estate and retirement planning. He is owner of Garton Financial Services and a principal with Family Business Advocates.)


The law allows for you to control where your money goes, even after death, through the use of charitable trusts and other estate- planning techniques.[[In-content Ad]]


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