Donors gain an immediate tax deduction, reduce their estate tax liability, and increase
the wealth passed on to heirs. A charitable trust is an asset placed in trust that
each year pays a specific sum of money or a fixed percentage of the trust to one
or more beneficiaries.
There are two main types of charitable trusts: a charitable remainder trust and
a charitable lead trust.
Charitable Remainder Trust
A Charitable Remainder Trust provides for a specified distribution at least annually
to one or more beneficiaries, at least one of which is not a charity.
For example, a charitable remainder trust can be established to pay the donor (or
another beneficiary, such as a spouse or child) an income stream for as long as
the donor or other beneficiary lives, whereupon the remainder of the trust will
be paid to Domestic Violence Solutions.
A charitable Remainder Trust offers three primary benefits:
- A lifetime income.
When you establish a trust, you direct that a specified
sum or a certain percentage of the trust be paid to you (and/or other beneficiaries)
each year. Most donors designate a sum or a percentage equivalent to 5% to 8% of
the value of the trust.
- A charitable income tax deduction.
Although Domestic Violence Solutions
will receive no benefit from your charitable remainder trust until the end of the
term of income payments, you - the donor - can take an immediate charitable income
tax deduction for the present value of the deferred charitable interest.
- Avoidance of capital gains tax.
When you fund a charitable remainder
trust with appreciated property, you incur no capital gains tax liability, either
when you transfer the property to the trust or when the property is sold by the
Mrs. Brown, who is 65, owns a piece of property that she bought for $25,000 and
that has since appreciated to $150,000. If Mrs. Brown sold the property, she would
incur costs of approximately $34,500, taking into account selling costs, commissions,
and capital gains tax. However, if Mrs. Brown transfers the property to a charitable
remainder trust that will pay her 7 percent per year (percents vary based on current
interest rates), she will receive an income stream of $10,000 annually and also
gain a substantial income tax deduction for her charitable gift.
Assuming that Mrs. Brown's charitable deduction results in a federal income tax
savings of $20,000 and that she invests this savings at 5 percent, her total annual
income will be $11,500 ($10,500 + $1,000) - nearly $5,725 more each year than if
she sold the property and invested the after-tax proceeds.
What's more, if Domestic Violence Solutions were the beneficiary of the charitable
remainder of her trust, DVS would receive the principal of the trust upon Mrs. Brown's
Charitable Lead Trust
A Charitable Lead Trust is the inverse of a charitable remainder trust, in that
it leads with a payment stream to charity and, at the end of the trust's term, confers
the remainder of the trust on a non-charitable beneficiary, such as the grantor.
Charitable lead trusts are typically created when interest rates are low, increasing
the present value of the charitable donation, while decreasing the taxable value
of the remainder that goes to heirs. Donors gain an immediate tax deduction, reduce
their estate tax liability, and increase the wealth passed on to heirs. Plus, Domestic
Violence Solutions, as your charitable beneficiary, benefits immediately.