You can give away property to charity, and receive an immediate tax deduction for your gift, but continue to receive income from the property. The way to accomplish these things is a charitable remainder trust (“CRT”). Here’s how it works.
STEP 1: Donate assets into the trust, and deduct. You can donate cash or, better, appreciated stocks, real estate, closely-held businesses, or other property. This is an irrevocable gift. The trustee invests the gifted cash or the sale proceeds of the gifted property for income and growth. You deduct the present value of the trust remainder at its projected end date.
STEP 2: Receive income from the trust. Every year you or the beneficiaries you designate will receive a fixed amount or fixed percentage of assets from the trust named by you in the trust document, at least 5% of initial balance (fixed amount), or 5% of balance at beginning of year (fixed percentage). You can choose monthly, quarterly, or annual payments. The income is taxable to the recipient according to the type of income that is deemed paid out, first from any accumulated ordinary income of the trust, and then from accumulated capital gain.
STEP 3: Distribute remainder at end of trust to charitable beneficiaries. The trust can be set for a number of years (example: 20 years, the maximum) or for the life of the donor or another person or other persons selected by the donor. Whenever the trust ends, the remaining assets are distributed to the charity or charities the donor has designated in the trust document.
Here are the basic benefits of a CRT:
- Reduce income taxes now by an accelerated deduction that you could not otherwise take for several years (if you keep to earn income for a number of years), or ever (if you keep to earn income through the end of your life).
- Continue to earn needed income on cash or other property you have given away.
- Avoid immediate capital gains tax on the liquidation of appreciated property given to the trust, thereby enabling you to diversify investments for income while preserving the full value (not reduced for capital gains tax) to be invested, thereby increasing your income.
- Also avoid immediate capital gains tax on investment gains in the trust over time (earn tax-free/deferred, similar to a retirement account).
- Defer capital gains tax on the liquidation of the property and investment gains in the trust, realizing capital gain over time only as income payments are received.
- In the case of a trust term for your life, receive a charitable deduction that is actuarially too generous because your actual life, during which you receive income payments, is likely to be longer than IRS-calculated life expectancy.
- In the case of a trust naming your fund at PCA Foundation as the charitable remainder beneficiary, you can modify the ultimate charitable beneficiaries with a simple communication to the Foundation, without the cost and time burden of amending the trust.
Consider this example.
Mr. Moore has a piece of real estate valued at $1M, at least part of the value of which he wants to give eventually for Kingdom ministry, but he currently earns income on the property and must continue to earn such income. In fact, Mr. Moore would like to sell the property and invest the proceeds in order to diversify the sources of his income. If Mr. Moore sells the property and invests the proceeds, he must pay capital gains tax on the sale and the continuing investment income, thereby decreasing how much he can invest, and decreasing his investment income accordingly.
However, Mr. Moore can instead open a charitable remainder trust with the PCA Foundation, and give the property to the trust for the trust to sell. When he does so, he avoids the immediate capital gains tax, and the trust has the full $1M to invest to earn greater income for payment to him, and to distribute eventually to his church and other favorite ministries. Moreover, he receives a charitable deduction now for the present value of the eventual charitable distributions, thereby decreasing his income tax and his effective cost of giving, and increasing how much he can give now or later.
Mr. Moore now has a charitable remainder trust with $1M. He has established the terms of the trust to pay him a 5% income distribution, or $50,000, each year. He receives the distribution in quarterly payments of $12,500. Since the assets in the trust are invested, they are open to market gains as well, but those gains are not subject to tax. Instead, Mr. Moore defers the capital gain on the initial sale and subsequent liquidation of investment assets, realizing capital gain only as he actually receives income distributions from the trust.
Mr. Moore has established the terms of the trust to distribute the remainder at the end of his life to his donor advised fund at PCA Foundation, and has recommended that the Foundation distribute the amount received among four charities he wants to benefit. They will each receive 25% of the remaining assets.
By using a charitable remainder trust, a donor like Mr. Moore is able to generate personal income from his gift while also alleviating his tax burden and thereby effectively reducing his cost of giving and increasing the amount he can give for the benefit of his church and other favorite ministries.
If you want to learn more, download our complete guide to charitable remainder trusts.