by Michael J. Russo, Jr.
Do you own substantial property or assets, but find yourself short of income? Do you own stocks, property or other assets that have increased significantly in value over the years? Will your estate - and your heirs - be liable for estate taxes after your death? Is there a special cause that you would like to carry on beyond your lifetime? If you answered "yes" to any of these questions, you may be a candidate for a Charitable Remainder Trust (CRT).
The process starts when you place assets into an irrevocable trust held by a trustee, who agrees to pay you an income each year for either your lifetime, or for a set number of years (no more than 20). You receive an immediate tax deduction, and you select the payout amount, at least five percent but not greater than 50 percent, to be paid to you and/or a designated beneficiary. When the trust ends, the remainder of the assets in the trust pass to the charity of your choice.
Here's an example that illustrates how a CRT works. Mr. and Mrs. Smith decide to fund a Charitable Remainder Annuity Trust (CRAT) with $250,000 of stock they purchased 20 years ago for $25,000. Because the trust is tax-exempt, the trustee can sell the Smiths' stock tax-free and reinvest the full $250,000 in income-producing assets. If the Smiths decide to receive monthly payments for 15 years and select a payout rate of seven percent, they would receive an annual income of $17,500. They can also claim a charitable deduction on their current year's income tax based on the value of the future gift (the "charitable remainder") that the charity will receive when the trust terminates. If the Smiths' deduction is limited on their current year's tax return, IRS rules allow them to carry forward any excess for five years.
In addition to providing the Smiths with a potentially sizeable income tax deduction and enhanced income, there are other benefits. Since the $250,000 is no longer part of their estate, they have effectively reduced their potential estate tax burden. Second, since there is no tax on the transfer, they have avoided the potential capital gains tax incurred had they sold the stock. Finally, they have the satisfaction of making a significant gift to a charitable cause important to them.
The charitable remainder trust may take the form of an Annuity Trust (CRAT), which pays out an annual fixed dollar amount which you select in setting up the trust; or a Unitrust (CRUT), which makes variable payments based on a percentage of the value of the trust's assets each year. Each type of CRT has advantages and disadvantages; your financial or tax advisor can help you make the choice that's right for you.
This intriguing mechanism can be taken a step further. Despite the many advantages of a CRT, Mr. and Mrs. Smith may have hesitated to transfer property out of their estate for the ultimate benefit of a charity rather than for their children. Is there a way to insure that the Smiths, the couple's children, and their favorite charity could all benefit from a CRT?
By using the after-tax income and savings from their charitable deduction (and possibly a portion of their monthly income stream), the Smiths could establish an irrevocable life insurance trust (ILIT) which, in turn, would purchase a life insurance policy on the Smiths. Upon their death, the proceeds of the life insurance policy would be passed to the trust beneficiaries (their children), tax-free.
While most people may be resigned to the inevitability of taxes, many may be unaware that with estate taxes, you have a choice. A certain amount of your money may go to society one way or another, but you can choose what form your "contribution" to society will be. Do you want your hard-earned assets to be channeled through the government or go directly to the charity of your choice? Viewed from this perspective, charitable giving takes on new meaning. The CRT may be a valuable tool to help put you in control of where your money goes.
Financial Planner Michael J. Russo, Jr, is a member of Community Memorial Foundation's Gift Planning Advisory Committee.
Community Memorial Hospital's long-term strength and vitality have always depended on the many friends who believe in the hospital's importance to the community. Their planned gifts are an investment in the health and well-being of future generations.
Besides a Charitable Remainder Trust, there are a number of simple, convenient options for a planned gift. Naming Community Memorial Foundation the beneficiary of a life insurance policy is one of the easiest ways to make a planned gift. A bequest in your will is another simple step that can significantly reduce estate taxes and allow you to make a larger gift than you could make during your lifetime. A charitable gift annuity will ensure fixed annual payments for life, partly tax-free, when you make an irrevocable contribution of cash or securities. You can designate the Foundation as a recipient of all or part of an IRA or other retirement benefit, avoiding estate taxes your heirs would otherwise owe.
You can direct your gift to the program or service area most important to you, or allow it to be used where it is most needed. Your gift, of any size, will make you a member of our Evergreen Society, honoring those who have included Community Memorial Foundation in their estate plans. Talk to your attorney or financial advisor about the most advantageous giving option for your situation. For more information, call us at 262.257.3769.
Community Memorial Foundation promotes and enhances the health of all individuals in our community through the development and management of resources in collaboration with the mission of Community Memorial Hospital.
The articles in LifeTimes are for information only. Talk to your tax, financial or legal advisor to make decisions best for your own situation.
You can review the previous issue of LifeTimes by clicking the link below:
Fall 2007: Do You Really Need a Will?
Spring 2007: Exercise Your “Will Power”
Fall 2006: Save Taxes with Year-end Giving
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