There’s nothing stopping you from donating money or property to your favorite charity today, tomorrow, or next week. After all, you can deduct some charitable giving on the next round of income taxes you file. However, there may well be a more cost-efficient way to donate to your charity of choice while reducing your taxable income, providing your loved ones with a steady stream of income, AND avoiding capital gains taxes. Enter the charitable remainder trust.
How Does the Charitable Remainder Trust Work?
A trust is a legally binding document that assumes ownership of assets after the grantor (the individual who created the trust) places assets into the trust. There are multiple benefits to creating and funding a trust, depending on the type of trust an estate planner is dealing with. To understand why Pennsylvania estate planners create charitable remainder trusts, we need to start with the issue of capital gains taxes.
Anytime you sell something for more than you originally paid for it, be it a house, business, cryptocurrency, or other appreciated assets, you must report the amount you gained on your income tax return. Once you fund your charitable remainder trust with appreciated assets, the trust itself may sell the assets and reinvest the capital gains in more lucrative investment vehicles without paying anything in taxes. That’s why a charitable remainder trust can be good for assets stuck in stagnated investment opportunities.
Once the assets in your charitable remainder trust have begun generating income, your beneficiaries may begin receiving a portion of that income. You may receive a set amount of money at set intervals (annuity trust) or a percentage of the trust’s value (unitrust). You may also designate yourself as a beneficiary. Once the grantor’s interest in the charitable remainder trust ends, the charity will receive the leftover assets (hence the name, “charitable remainder trust”).
That Sounds Great. Any Drawbacks?
The main challenge of a charitable remainder trust is that it is irrevocable. In other words, you may not revoke the assets with which you fund the trust or undo other terms of the trust except in extraordinary circumstances. Additionally, minimum gift amounts usually apply to these types of trusts, as well as minimum beneficiary payments. The charity a grantor chooses must also pass a series of tests in order to receive the full benefits of a charitable remainder trust.
Let a Pennsylvania Estate Planning Attorney Guide You
There are numerous benefits to creating a charitable remainder trust in Pennsylvania. However, because this type of trust is irrevocable, grantors must think long and hard about using one. The best resource for Pennsylvania estate planners is an experienced and knowledgeable attorney who understands the many nuances of a charitable remainder trust. The team at HighPoint Law Offices has helped Pennsylvanians give to charity in cost-effective ways while providing loved ones with financial security. Call us at (215) 997-9773 to discuss your needs today.
