Americans are some of the most generous givers on the face of the planet. We claimed $74.5 billion in charitable deductions in 1995, according to a recent report from the Internal Revenue Service. Tax advantages for charitable donations provide a tangible incentive to fund worthy causes. According to a recent study by a Washington, D.C.-based organization, Independent Sector, donations are more likely to occur when a tax break is available to the donor.
More than 80 percent of those who itemize their tax returns contribute to charities, according to a recently released Price Waterhouse study of 1995 IRS data.Nearly 70 percent of U.S. households contributed to charity in 1995, benefiting more than one million nonprofit organizations in the U.S. The recipients of such generosity include schools, hospitals, human service agencies, arts and cultural organizations, foundations and religious institutions.
Few realize, however, that contributing to a worthy cause can be a powerful estate-planning tool. Having an estate-planning attorney prepare a charitable remainder trust (CRT) as part of your estate plan is an effective way to donate to a favorite cause while benefiting yourself and your family. Whether you are a budding philanthropist or an investor looking for strategies to maximize income and tax advantages, the CRT offers a powerful estate-planning solution. The CRT combines current charitable income-tax deductions and future estate-tax deductions with the opportunity to avoid capital-gains tax on a highly appreciated asset. It also provides you with a new source of income.
A CRT is called for when a benefactor has a highly appreciated asset - such as real estate or stocks - that provides little or no income. Owning such an asset is a double-edged sword. You can't sell the asset without the costly bite of state and federal capital-gains taxes. On the other hand, if the asset remains in your estate when you die, it will increase your estate taxes. Of course, you could donate the asset directly to charity and gain an immediate charitable income-tax deduction. This action would reduce the value of your estate - and thus future estate taxes - as well as avoid capital-gains taxes. But you'd miss out on an opportunity to maximize your income. The CRT is designed to solve this dilemma.
When you create a CRT, your highly appreciated property is transferred to your trust. The asset is then usually sold, with the proceeds used to buy income-producing investments. Then, each year for the rest of your life, you receive income from your CRT. When you die, your designated charity will receive whatever remains in your trust. Thus the name charitable remainder trust.
There are two types of CRTs from which to choose. Conservative investors seeking a predictable annual income may prefer the charitable remainder annuity trust (CRAT). Regardless of the economic winds, your income is guaranteed. If your asset doesn't earn enough to pay your annual income, the principal will be used to make up the difference. On the other hand, if your asset outperforms your expectations, the surplus will be added to the principal.
The charitable remainder unitrust (CRUT) differs from the CRAT because it allows the benefactor to ride the financial markets and enjoy the investment performance of trust assets. Your estate-planning attorney will help to determine which type of CRT will work best for you.
The ample benefits offered to the donor by a CRT are obvious. But what about your heirs? After all, you've given away a piece of their legacy in order to gain income and tax advantages for yourself today. A frequently employed solution in this situation is the use of a wealth replacement insurance trust. When used with the CRT, a wealth replacement trust provides your heirs with an income-tax-free legacy equal to the full value of the asset you donated to charity.