Charitable trusts have tax benefits, too |

Charitable trusts have tax benefits, too

Tracy Tutag and Jeffrey Apps
Vail, CO, Colorado

There are many ways to share wealth with others. Giving to children, grandchildren and charities are just a few examples. Many people wish to acknowledge the benefits they received from their education or medical care by contributing to their university, medical facility or other qualified charitable organization.

In addition to the joy of giving, there are a number of other incentives for charitable contributions. Charitable gifts can provide a significant income tax deductions in addition to the satisfaction of helping a worthy cause. And, when properly structured, such gifts may also enable the donor to avoid capital gains taxes, reduce or eliminate estate taxes and even diversify the giver’s investment portfolio.

Some of these diverse objectives may be achieved through a type of tax-exempt trust known as a Charitable Remainder Trust. In establishing this kind of trust, the donor receives:

An income tax deduction for the present value of the trust’s remainder interest directed to the charity.

Lifetime annual income for the donor and spouse.

The principal of the trust distributed to a designated charity.

The donor’s estate is reduced by the assets transferred into the original trust.

A charitable trust may offer substantial financial flexibility, even to middle-income taxpayers, simply because they don’t know about helpful alternatives. The donor often transfers appreciated but low-income or non-income producing assets to the trust to be converted into an income-producing portfolio without paying capital gains taxes on the sale.

A donor establishes a charitable trust by transferring debt-free assets into an irrevocable trust. If assets with debt, such as mortgaged real estate, are transferred into a trust, adverse tax consequences result. Once the assets are sold, the proceeds of the sale are invested in an income-producing portfolio. In the case of a married couple, this income can last until the death of the surviving spouse when the principal of the trust passes to the designated charity or charities.

Thus, appreciated stock, real estate or other appreciated assets can be converted into an income stream to provide college funds or retirement income while assisting a worthwhile charitable cause. Many financial experts feel that charitable trusts will continue to be a beneficial arrangement for both donors and recipients as the federal government looks increasingly to the private sector for financial support of social programs.

Because assets must be placed in an irrevocable trust to gain the full tax benefits, the most likely candidates for charitable trusts are individuals age 60 or older who are willing to give up ownership of assets to accomplish their financial goals.

The biggest objection to this strategy may be that heirs are overlooked in passing on some of a family’s assets. This situation can be addressed by using a portion of the income generated by the trust to purchase a “wealth replacement” life insurance policy equal to the value of the trust. The proceeds of this policy can be arranged to pass free from both income and estate taxes if properly structured to the family’s children or heirs at the death of the surviving spouse.

Charitable Remainder Trusts are governed by a complex network of regulations. To ensure both the charitable contribution and full tax benefits, a charitable trust must be structured by an experienced estate planning team which may include a lawyer, CPA, insurance professional and financial specialist. Business owners, as well as families and individuals, can benefit from the use of charitable trusts in achieving charitable, as well as financial, objectives.

Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors, LLC (member NASD, SIPC) 1290 Avenue of the Americas, New York, NY 212-314-4600 and offer annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. They can be reached at 926.0601 or

Support Local Journalism