In the process of planning your estate, you may decide to incorporate a favorite nonprofit to make sure they continue to receive your help. There is a way to do that, and it doesn’t involve making your survivors or beneficiaries write checks every month.
A charitable trust lets you give a portion of your estate to your favorite charity organization, and it allows you to transfer property to a charitable organization. The property is taken out of your estate, and no longer subject to any federal estate taxes.
This type of trust works with larger property, and gives you and your heirs a tax break. (Smaller donations aren’t really suitable for a trust.) The charitable trust allows you to give to your favorite charity and make sure they’re taken care of in your estate, but still generate cash flow before your death.
The most common type is called the Charitable Remainder Trust, in which an IRS-approved charity receives your property and manages or invests it for you.
As the trustee, the charity manages the trust so that it produces an income. The charity then pays you or someone you designate a portion of the income generated for a specific number of years, or the rest of your life. At the end of that period, or at your death, the property and any appreciation go to the charity.
Advantages Of The Charitable Trust
There are a number of advantages to choosing a charitable trust as part of your overall estate plan:
• Income tax deductions for up to five years
• Reducing eventual estate and gift taxes
• Reduce or eliminate capital gains taxes
• Creating income with a non-income producing property
• Preserve the value of highly appreciated assets
A charitable trust allows you to turn property that has appreciated, or gone up in value since you acquired it, without paying capital gains on it. Charities don’t pay capital gains, even if they sell the property, because the non-taxable proceeds will stay within the trust.
The caveat is that the property donation is irrevocable—you can’t change your mind later. Once it’s done, it’s done, and you won’t be able to recover control of the property.
Income From The Trust
There are two ways to receive monies from the trust. The payment type will depend on how you structure the trust:
• The Fixed Annuity—the charity pays you a set amount on a regular basis, such as yearly. Once you set the amount, you can’t change it. You can set the payment amount to as much as you like, but set it too high and it will begin to degrade the principal. Many charities will be reluctant to accept a trust if most of it will eventually be paid back to you.
• A Percentage Of Trust Assets—the trust pays you a percentage of the current worth of the property, such as 10%. (The IRS requires that the trust pay you at least 5%.) Your payment will fluctuate with inflation and after a yearly reappraisal.
Your Chicago Estate Planning Attorney
James C. Provenza is a leading Illinois estate planning attorney with years of experience helping clients with estate planning to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form.