Although most clients want to pass on their assets to family and friends, some also want to donate to charities. The charitable remainder trust (CRT) allows donations to your favorite charity and, in the process, reaps tax benefits for you as the donor to the charity.
The idea of giving to charity would seem to be a simple, but the simple methods aren’t always the best ones. Sometimes a bit of financial finesse can go a long way, helping both your charity of choice and your own finances. I refer to that as “doing well by doing good.”
If you want to be a tax-savvy philanthropist, consider using a time-honored strategy known as a “charitable remainder trust” (CRT). The Times-Herald Record recently offered a crash course in their article, “Protecting Your Future: Trust option for leaving assets to charity.”
A CRT allows you to give assets to charity in a tax-savvy manner that may even provide an income stream that helps both you and your charity. When the CRT is established, the assets you’ve chosen to donate are transferred to the trust. The charity you’ve chosen is the trustee, and manages the assets. They may pay you and/or your beneficiaries a portion of the income generated by the trust either for a certain number of years, or your entire life. At the end of the term, depending on the type of payout you’ve chosen, the charity receives the remainder of the principal in the trust.
This strategy works best when the underlying assets are highly appreciated, and by donating them to charity you can avoid a significant capital gains tax.
Of course, your family members may not be too happy to see those assets going to charity – so you may want to consider replacing their value for your heirs with life insurance.