The notion of “giving back” through some form of philanthropy is common in implementing a wealth management strategy. Of course, making a cash contribution or donation of assets is an easy and direct way to benefit charitable causes that fit your objectives. But are there ways that can increase the efficiency of your gifts? The answer to that question may be in a variety of trusts specifically designed to enhance the opportunities to give.

Charitable Remainder Trusts, Charitable Lead Trusts and Foundations can all have specific uses and value in the building of a comprehensive wealth management strategy.

There are significant tax advantages for all of them. First, contributions are deductable up to 50% of an individual’s Adjusted Gross Income (AGI) in the form of cash and 30% in the case of other property such as stocks, real estate, etc. The gifting of securities and/or real estate has the additional advantage of not having to recognize the taxable gains due to appreciation in the assets. This results in an additional advantage over a cash gift since taxes have already been paid on those funds. With no tax on the gains and deductable up to the maximum allowed for a taxpayer’s AGI this allows for a potentially significant double advantage.

The Charitable Remainder Trust offers some advantages beyond the above tax advantages in that the donor of the cash and/or property can receive an income stream from the gift for a period of time specified in the trust. This could be specific number of years or for the lifetime of the donor(s). The length of time is critical. Since an income stream comes back to the donor(s) the IRS has tables that will indicate the amount of present value retained by the donor. The balance is the remainder interest for the charity which is tax deductable. This is often used in a wealth management strategy with highly appreciated property since the total value of the gift can be transferred without tax consequences allowing for the entire value to be used for the income calculation.

The easiest way to understand a Charitable Lead Trust is to think of it as the opposite of a Charitable Remainder Trust. In the Charitable Lead Trust case the income goes to the charity for a stated number of years and the remainder comes back to the donor(s). This can allow for a discounted value of the remainder interest to be used for non-charitable transfers to minimize the amount of property tax for estate and/or gift tax purposes. It allows for the entire value of the property to be gifted to the trust deferring tax liability.

Charitable Foundations are best used for continuing support of tax-deductable organizations for an extended period or in perpetuity. Cash and/or property is donated to the foundation. A minimum of 5% must be distributed to qualifying charities each year. Foundations are often used as a vehicle to bring the families charitable interests together as one family unit. Many believe that involving the family in this manner provides more discussions about money values and provides an additional focus for family unity.

The whole topic of charitable trusts is fairly complex and this post is not designed to cover all the details but rather to provide a basic overview to start a conversation with your wealth advisor team.

For more information, please read more posts from of our series on trusts using the link below.

Top 10 Reasons to Establish a Trust
Revocable Trusts in a Wealth Management Plan
Irrevocable Trusts in a Wealth Management Plan
Charitable Giving using Trusts in a Wealth Management Plan
Special Needs Trusts
Passing Real Estate on to the Next Generation with Trusts

White Oaks Wealth Advisors offer trust services to clients throughout the United States from its offices in Minneapolis, MN and Longboat Key, FL.

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