For many, the holidays are a time for giving. But you can donate to your most valuable causes year-round while earning income and tax benefits. Many people do this by turning to different types of gifting trusts and gifting accounts. These can also be structured to support your loved ones as well. So let’s take a look at some of your options.
Charitable Remainder Trust
One common type of gifting trust is called a charitable remainder trust (CRT). With this type of structure, you transfer assets such as cash, stocks, or real estate directly to the trust. At the beginning of the trust term, the trust generates income for your heirs. And what remains at the end of the trust term or after you pass is donated to your chosen designated charities. So it’s a way to support your loved ones as well as charities.
This type of trust may suit families that can use the current income generated by the trust before it passes on to charities.
In addition, it offers a partial tax deduction depending on the assets that will pass on to your chosen charities. And because it effectively removes assets from your estate, it may help you reduce or avoid estate taxes. Furthermore, appreciated assets would be exempt from current capital gains taxes.
There are two main types of charitable remainder trusts.
A charitable remainder annuity trust (CRAT) offers a fixed annuity amount to the beneficiary annually. On the other hand, a charitable remainder unitrust (CRUT) provides the beneficiary with a fixed percentage of trust assets each year.
Charitable Lead Trust
A charitable lead trust (CLT) functions like a reverse charitable remainder trust. With this type of trust, assets are transferred to your designated charities at first for a set number of years. And what remains is transferred back to you or your heirs. There are also two main types: a charitable lead annuity trust (CLAT) provides charities with a fixed annuity each year, and a charitable lead unitrust (CLUT) provides your charities with a fixed percentage of trust assets annually.
But it’s important to note that both CRTs and CLTs are irrevocable. This means you can’t withdraw assets from these trusts once they are formed.
Donor-Advised Fund
A donor-advised fund (DAF) is designed to solely benefit your chosen charities while offering you tax benefits. You can donate various types of assets such as cash, stocks, and real property to a DAF and be generally eligible for an immediate tax deduction up to 30 percent of adjusted gross income. In the trust, your donations may grow tax-free. And the charities you pick will receive grants from the fund immediately or over time, giving you a certain degree of control.
Another advantage is that you can directly transfer appreciated assets such as stocks and mutual funds to the DAF account. This prevents you from selling those assets first, which may trigger capital gains taxes. This also means the charity would benefit from the full amount of these appreciated assets.
For instance, say you bought $20,000 worth of stocks that grew to $40,000. If you sold the stocks first and then donated to charity, you’d face a capital gains tax on the appreciation of $20,000. So your donation would essentially be reduced. And it can be by a lot for those with high incomes, as the highest short-term capital gains tax is 37 percent.
You can open a DAF at various financial institutions.
The Bottom Line
Taking advantage of charity trusts and charitable investment accounts can not only help you donate to the causes most important to you, but also provide you with tax benefits, current income, and donations to your heirs. DAFs in particular offer the benefit of immediate tax deductions, which can be quite substantial.
But a note on trusts: These entities can be incredibly complex and risky. So to do it right, you should seek the help of a qualified estate planning attorney and tax professional.
Further, it’s also important to remember the example you’d be setting through charitable trusts and accounts. You could instill the importance of charitable giving in your family, while helping those in need. It can be a solid portion of both estate and legacy planning.
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