Last week, I blogged about charitable trusts and donor-advised funds from a high-level. As promised, this week, I will be diving deeper into the benefits, focusing specifically on the tax benefits of implementing either a charitable remainder trust (CRT) or a charitable lead trust (CLT). As a general guideline, assets tied to your estate, once used to fund a charitable trust, move out of your estate. Keep these topics and questions in mind as we move forward:

  • What are your wealth preservation goals?
  • Which charities are on your list and how will they receive your assets?
  • Who do you want to receive which assets and when?
  • Do you want to create an income stream?
  • Do you want or need the ability to change your charitable beneficiary?

Major Tax Benefits Of Charitable Remainder Trust (CRT)

As I mentioned in last week’s blog, a CRT is the route to go if you have holdings in real estate and stocks. You’ll be able to sell those assets within the trust and avoid paying capital gains taxes. In this way, the trust receives the full fair market value of the assets, meaning there is more to donate to both the charity and your non-charitable beneficiaries.

CRTs are tax-exempt therefore, it’s a great reason to establish a CRT is when you own property and desire to donate heavily to charity. The property can be used as “funds” for a CRT, in which it can produce income in its non-income-producing capacity. In this instance, the CRT owns the property and sells the property. The sale preserves the charitable remainder, which generates income to you as the donor.

Because income is part of a CRT, you have potential for income tax deduction to make use of— based on the value of the donation to charity. Be sure to ask your professional tax advisor or CPA for the best way to proceed. If you would like a recommendation on tax professionals in Massachusetts, shoot me an email!

Major Tax Benefits Of Charitable Lead Trust (CLT)

An income tax deduction is also available if you decide to form a charitable lead trust. “A CLT established during a donor’s lifetime may be designed so that the donor benefits from an up-front charitable income tax deduction in the year it is funded.”Source: Fidelity

Funding your charitable trust with assets from your estate rids you of the pain of estate taxes. This is a big plus because upon your death, your estate will owe fewer taxes. Additionally, that money saved can be dispersed to your beneficiaries. “If a contribution to a CLT occurs upon the death of the donor, that donor will be eligible for an estate tax deduction for the value of the interest paid to the charity.”

More good news regarding taxes keeps coming in the form of a reduction of gift taxes. Gift taxes come into play when donating a gift (monetary or otherwise) to someone outside of a trust. However, there is a possible penalty for the beneficiary if he or she is not the donor—they may be subject to tax on the interest of the gift. More specifically, these types of CLTs are known as “non-grantor CLTs.” If you’re interested in establishing a CLT and/or giving gifts outside of a trust, we can discuss your options offline. Feel free to reach out to me via email (see below) or by phone: 978-462-0100.

Donor-Advised Funds (DAF)

Donor-advised funds are returning as a strategic addition to either your charitable remainder trust or charitable lead trust. It can easily complement and benefit either type of trust. To put it simply, a DAF adds flexibility, not complete power, to amend certain parts of an irrevocable trust such as a CRT or CLT.

A DAF would work best when placed in between a trust and a charity. Think of it as a middleman. This allows flexibility with deferring a distribution or direct charitable donation. It also allows other charities to be considered and incorporated into the trust.

The CRT Life Insurance Strategy

This is one heck of a smart way to utilize the maximum benefits that some people may not see with all these tools fragmented. Once they come together like puzzle pieces, you’ll learn a CRT can fund a life insurance policy. Here’s how: a donor could establish a CRT for the usual purpose of charitable giving and using the income stream to pay for the insurance premiums. Again, I come back to killing two birds with one stone. You can duplicate protection for your family and charity with one tool, the CRT. The remainder of assets will be donated to the charity while the life insurance policy covers you and is passed to your beneficiaries upon your death. In this instance, usually, the life insurance policy is owned by a separate life insurance trust.

For questions regarding any of the topics discussed in this blog, please contact me directly at [email protected].

Thank you for reading,
Suzanne Poitras