Individuals who want to give large sums to charities may elect a charitable trust, which offers them several substantial tax breaks in addition to helping out their favorite charities. However, if an individual only wants to donate small charitable amounts, a charitable trust probably isn't advisable.
Charitable trusts are irrevocable. Consequently, once you have formed it and it commences, you cannot regain legal control of the assets placed in the trust. Allowable charities must be approved by the Internal Revenue Service (IRS), with tax exempt status.
A charitable remainder trust is the most common type of charitable trust. Those who donate to a charitable remainder trust are typically allowed to write off the value of their gift over a five-year period. In addition, at the end of the specified payment period or the individual's death, trust property goes to the charity outright and is not considered part of the estate. Consequently, it is not subject to federal estate tax. This would only be advantageous to large estates.
A charitable trust also allows individuals to avoid paying capital gains tax by allowing assets, which have significantly increased in value, to be converted into cash without paying tax on the profits. Non-income-producing assets in a charitable trust are typically sold, and the proceeds are used to purchase assets that produce income. However, charities are not required to pay capital gains tax. consequently, the proceeds stay in the trust and are not subject to capital gains tax.
In addition to receiving huge tax breaks, individuals who set up a charitable remainder trust normally structure it so that they will receive regular payments from the trust. They may opt for a fixed annuity so they will receive the same amount of income from the trust each year, even if the trust investments perform at a rate lower than expected. Individuals may request annual payouts for as much as they want. However, greater payouts naturally result in a lesser amount allowed for income tax deduction. Plus, payments that are set too high might start to tap into the principal amount and perhaps exhaust the trust before the payment term is over, leaving nothing for the charity. Most charities are unlikely to accept a donation in the form of a charitable trust if it is possible the payout schedule will outlast the assets.
Annual payments may also be set up as a percentage of the value of the trust each year, to be reappraised annually. for example, the charitable trust could stipulate that the donor receive 10% of the value of the trust each year. Since payments are dispersed as a percentage rather than a fixed dollar amount, if the value of the assets in the trust increases, annual payments to the donor would increase proportionately. Under current IRS code, individual must receive a minimum of 5% of the value of the trust annually.