Charitable Gifting Through Trusts

In recent articles, we have talked about some choices we have in order to be voluntary philanthropists. Voluntary philanthropists plan ahead. They decide who will benefit from their estate, not the government, a relative or friend.

Some ways to leave assets to chosen charities are outright gifts, bequests at death, life insurance (discussed in a previous article), charitable remainder trusts, charitable lead trusts and charitable gift annuities. This article will discuss the last three.

A charitable remainder trust (CRT) is an irrevocable trust that allows specified payments to one or more non-charitable beneficiaries with a remainder interest to be paid to a charitable organization.

A charitable lead trust (CLT) is a trust instrument that provides specified payments to a charitable organization for the term of the trust with the remainder interest paid out to the donor or other beneficiary. You can choose a CLT that is based on an annual or more frequent fixed percentage of the assets as a payout or one that provides for an annual or more frequent payout of a fixed sum.

A charitable gift annuity (CGA) is a contractual obligation between a donor and a charity. The donor makes a contribution to the charity and the charity promises to pay the donor a specified amount of annual income for life. The combination of partially tax-free income and the initial charitable deduction makes this an attractive agreement.

Following is an example of a CRT strategy.

Say that someone gifts a highly appreciated real estate property to the CRT. Then, the CRT sells the property and buys an annuity sending monthly income out to the donor. At the death of the donor, the CRT transfers the death benefit of the annuity over to SMCF and everyone is happy.

In more detail, say that you bought land as an investment in 1990 for $500,000 in an area close to Scottsdale, Arizona. As Scottsdale grew, your property bordered a key intersection where a developer wanted to buy it to build a grocery store chain and retail shopping center. They made an offer to purchase the property for $2,000,000.

Faced with a 15% capital gains tax, you want to find a better solution than just a straight sale. So, after consultation with your financial advisor, you settle on a Charitable Remainder Trust (CRT). You set up the CRT with your attorney and transferred the title of the property to the CRT. You then had the CRT sell the property to the developer.

This allowed you to avoid the taxation of the gain from the sale since the property was owned by the CRT. You then had the CRT buy an annuity that could guarantee income for life on the full value of the sale of the property. So, the CRT bought the annuity with the full $2,000,000 of sales proceeds without any tax concerns. The annuity would then begin paying you $120,000 per year guaranteed for life. This calculation is 6% of the $2,000,000. At your death, the CRT would donate the death benefit of $2,000,000 to SMCF as your charitable remainder donation.

That strategy saved your $225,000 in capital gains taxes ($1,500,000 gain X 15%.) That tax savings allowed you to live on $13,500 more in income annually ($225,000 tax savings X .06% income distribution).

In addition, you left $2,000,000 to SMCF at your death so they could further support their mission of working with the community of San Miguel. With the help of financial planning professionals, you benefitted from maintaining your income needs while living and making a philanthropic contribution at your passing.

SMCF’s goal here is to acquire property and pay an income to the donor for life. Property can be transferred to the foundation, which it then sells to buy an annuity contract. The contract provides a certain amount of money for life for the donor. At death the foundation will inherit the amount left over as the beneficiary.

By selecting one of these models, SMCF can create an income stream for you for life, while providing for your beneficiaries, including charities.

It’s a win, win, win situation! You, your family and your favorite charities through the San Miguel Community Foundation.