Supporting charitable organizations is an important part of many folks’ long-term financial plans, whether during their lifetime, at death, or both. Beyond just the amount, it is also important to consider the timing of your support.
Perhaps you itemize your deductions, so you get a tax break for your charitable contributions. Or maybe you donate your required minimum distributions (RMDs) via qualified charitable distributions (QCDs), so you realize a tax benefit by not having to include the RMDs as part of your income. At one end of the spectrum, your charitable contributions—via QCD or otherwise—will be limited; at the other end of the spectrum, your income might be such that charitable contributions have no impact tax-wise. In short, while it is possible for charitable contributions to significantly impact your taxes, it is also possible for charitable contributions to have no impact on your taxes.
Besides tax considerations, you may also want to spend down your wealth for Medicaid or estate tax purposes. Or you may simply wish to see the impact of your contributions while you are still alive. Fortunately, there are various options that may be suitable for your needs.
Charitable lead trust
A charitable lead trust (CLT) is an irrevocable trust designed to support one or more charities for a set period of time, after which any remaining assets go to specific beneficiaries (such as family members or even the initial donor). The money in the CLT is invested over the set duration, allowing it to grow between planned payments to charities. It is the inverse of a charitable remainder trust (discussed below).
Payments can be structured as an annuity, where a fixed amount is paid at each designated interval, or a unitrust, where a fixed percentage of the then-present value of the trust is paid at each designated interval.
A charitable lead annuity trust (CLAT) is a CLT where payments are fixed.
A charitable lead unitrust (CLUT) is a CLT where payments are a fixed percentage of the trust value.
The initial funding can be done during the donor’s lifetime or upon their death. Because you no longer have control over property transferred to an irrevocable trust, such transfers are completed gifts. As a result, creating a charitable lead trust may entitle you to a partial income tax deduction based on the trust term, projected payments, and applicable interest rates. However, trust earnings are taxed to the grantor (i.e., the person creating and funding the trust). IRS rules here are tricky, and careful planning is necessary, so do not attempt this without professional assistance!
Donors that wish to retain some control can name a donor-advised fund as the charitable beneficiary. After the donor-advised fund receives payments from the trust, the donor can recommend grants to the fund to support chosen charities.
Charitable remainder trust
A charitable remainder trust (CRT) is an irrevocable trust that provides an income stream for one or more designated beneficiaries for a set period of time, after which any remaining assets go to one or more designated charities. The term can be for up to 20 years or the lifetime of a non-charitable beneficiary. The money remaining for charitable contributions after payouts to beneficiaries must amount to at least 10% of the initial value of all property transferred to the trust.
A charitable remainder annuity trust (CRAT) is a charitable remainder trust where payments are structured as a fixed amount (i.e., an annuity). A charitable remainder unitrust (CRUT) is a charitable remainder trust where payments are structured as a percentage of the trust value (i.e., a unitrust). In both cases, annual payments must be at least 5%, but no more than 50%, of the trust value. Additional contributions are allowed for CRUTs, but not CRATs.
Donors can receive an income tax deduction for the present value of the portion of the trust that will eventually go to charity. In the meantime, investment income that remains in the trust is not taxable. Payments received by non-charitable beneficiaries are reported on Schedule K-1 and are taxable income.
Charitable gift annuity
A charitable gift annuity (CGA) is a contract between the donor and charity that provides the donor a fixed income stream for life in exchange for a contribution. Many large nonprofit organizations and universities offer charitable gift annuities.
If an organization you wish to support in this manner does not offer a CGA, you can still create a CRT to benefit the charity. However, a CRT is more complex because it involves creating a trust as a separate legal entity, rather than simply a contract between two parties.
Your contribution is set aside in a designated account and invested. You receive payments from the account for the remainder of your life. If you and your spouse are giving as a couple, payments continue until both spouses have died. Afterwards, the charity receives the remaining funds in the account. Charities can also immediately spend down the assets it receives, provided that they have sufficient reserve to meet ongoing payment obligations.
Donors may be eligible for a tax deduction based on the estimated amount that the charity will eventually receive. A portion of the income stream payments is taxable.
Grantor retained trust
Individuals concerned about the estate and gift tax exemption limits can effectively “freeze” the value of their estates using a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT). Both involve irrevocable trusts that provide an income stream—whether a fixed amount (GRAT) or fixed percentage (GRUT)—to the donor for a set period of time, after which the remaining assets pass to loved ones. GRATs and GRUTs are not designed to support charitable organizations, but they are included here because they are an important estate planning tool often used in tandem with one or more of the options discussed above.
The grantor receives the value of the assets transferred over the term of the trust while earning an IRS-specified rate of return. Any remaining assets, which are essentially the appreciation of the original contribution minus the rate of return, pass to beneficiaries upon the expiration of the trust.
Are any of these right for me?
Deciding whether one or more of these giving tools are right for you involves examining your individual needs, goals, wealth composition, and tax environment, so there are no simple answers. Additionally, the IRS will closely scrutinize these types of trusts, and the regulations are complex, so please seek professional advice if you are considering them!
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