By Michael Buccino
Most of us humans are programed to want to help others and improve the world around us. When we do, whether directly through volunteer support or indirectly through financial support, it feels good. In 2015 an estimated 62.6 million people volunteered for charitable work according to the United States Department of Labor Bureau of Labor Statistics. During the same year donations from America’s individuals, estates, foundations and corporations reached an estimated $373 billion, setting a record for the second year in a row according to Giving USA.
As the Internal Revenue Code evolves it will be more important for donors to consider charitable giving strategies. Tax and charitable benefits can vary significantly depending on a donor’s speci c circumstances as well as the strategy they pursue.
For donors seeking to make a charitable donation, provide themselves or someone else with an annual income stream and to recognize a charitable deduction during a specific tax year, a Charitable Remainder Trust (CRT) may be the perfect solution. Here’s how it works:
First, the grantor (person contributing assets to the CRT) must choose at least one income beneficiary and at least one charitable remainder beneficiary. The income beneficiary is the person who will receive the stream of annual income. The income beneficiary may be the grantor or another person. The charitable remainder beneficiary is the charitable organization that will receive the assets remaining in the trust at the end of the trust term.
Second, the grantor must choose how much to contribute to the trust. The tax deductible portion of their gi will be based on a calculation that includes the trust type, the size of the annual income stream, the term of the trust, and published Internal Revenue rates. Generally, a larger annual income stream will result in a smaller payment to the charitable organization and a smaller charitable deduction to the grantor. Charitable Remainder Trusts may be funded with cash, publicly traded securities, some types of closely held stock and real estate. Significantly appreciated assets that generate little income are o en the best type of assets to fund a CRT.
Lastly, the grantor must choose the term of the trust and the size of the annual income stream. The term of the trust can vary depending on several factors. The income stream can also vary greatly. It is in these variations that you can creatively design the trust to meet your specific income and charitable goals. A well planned CRT strategy can provide powerful wealth transfer to the next generation and significant current income tax savings.
Once a CRT is established and funded, the grantor will receive a charitable deduction, the income beneficiary will receive an annual income stream and a charitable organization will receive what’s left in the trust at the end of the trust term—win, win, win. If done well a family will increase their overall net worth while giving funds to worthy charities.
If you are looking for ways to help a favorite charity or just get a bigger income tax deduction you should consider a CRT. It is just one of the many charitable strategies available but happens to be one of the most powerful. As always, consult with your tax advisor and attorney before pursuing this or any strategy.
Michael Buccino, a registered CFP, is a Vice President with e Dowling Group in the Wealth Management Practice.
