As a nurse, you know the intangible rewards of giving care. But when you give a gift to a charity, you can receive a tangible reward. If you plan ahead and establish a charitable trust, you can give in ways that lower your taxes. And, no, you don’t have to be rich to do it.
Benefits of a charitable trust
What exactly can a charitable trust do for you? Depending on the type of trust and your circumstances, it may allow you to:
• claim an income tax deduction
• reduce your federal tax on capital gains
• receive regular income from a donated asset
• lower estate taxes by reducing the size of your estate.
Let’s look at a few common strategies.
When you transfer an asset, such as money or property, to a charitable trust, you can name yourself, someone else, or the charity as the recipient of the trust’s income. Also, you can decide who will receive the asset when the trust ends.
A charitable remainder trust allows you or someone else to receive income. The asset becomes the property of the charity, but the income goes to you for your lifetime or a specified number of years. In the year of the transfer, you can take a charitable deduction on your tax return based on the value of the charity’s future interest.
The income from the asset can be paid as a fixed amount per year or a fixed percentage per year. With a fixed percentage arrangement, your payout will fluctuate from year to year based on the value of the asset. Such a variable income stream can make estate planning more difficult. To make your cash flow predictable, you can choose a fixed amount per year, but in many cases, the charity gets a larger percentage of the assets when you die because less money has been distributed to you.
One great strategy is to use your income from the charitable trust and the tax money you save to buy a life insurance policy in an irrevocable trust. The amount of insurance is usually equal to the value of the asset you placed in the trust. When you die, the beneficiary receives the cash payout free of estate and income tax, and the charity receives whatever is in the charitable trust.
If you don’t want to give assets away, you can create a charitable lead trust. The charity receives income from the assets for a period of years. When you die, your estate or a beneficiary receives the asset, and the trust is closed. This trust works well if you don’t need an income stream and you want to maintain control of the asset. It’s also beneficial if you may need the asset in the future but want to donate it while alive.
Because charities are tax-exempt, your trust is also tax-exempt. That means the trust can sell assets without facing a capital gains tax on the profit. Say you own assets that would create a large, taxable gain if you sold them—for example, shares of a stock whose value has risen significantly since you bought or inherited them. If you place them in the trust, the trust can sell them and reinvest the money in income-generating assets, without triggering an immediate tax on the sale of your stock.
You can create trusts for many reasons and use them for many purposes. Keep in mind that this article presents an overview of using trusts to make charitable donations. If you want to establish a trust, your next step is to consult a financial advisor who can determine the best options for your situation.
Cindy Diccianni is a Certified Senior Advisor, a Certified Long Term Consultant, a Registered Investment Advisor, and a Registered Representative with Leigh Baldwin & Company. She is affiliated with Ortner, O’Brien & Ortner Advisory Group, Inc. in Malvern, Pennsylvania. You may contact her at Cindy@taxlegalfinancial.com.