Dear Dan,
This time of year, I read article after article about charitable donations. That makes sense with the Dec. 31 tax deadline approaching but most seem to be about donations that take the assets out of the family’s hands entirely. Are there ways to give to charity and keep the money in the family?
— Donny in Memphis
Dear Donny,
There are ways that the family can benefit charities and keep some of the assets for the family’s benefit. I’ll give you some of the basics on three common vehicles, but you should consult with your financial planner and proper legal and tax experts to see the exact impact on your family if any of these seem workable to you.
A Charitable Remainder Trust (CRT) is a trust that provides you with an income stream for a period. The most common term is for the life of the donor or that of the donor and a second beneficiary, usually the spouse. The cash flow paid from the trust to the donor can be a fixed amount or a variable amount based upon a percentage of the assets in the trust. Whenever the term of the trust concludes, whatever remains in the trust goes to the designated charity or charities.
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The trust is funded by an irrevocable donation to the trust. The donor gets an immediate tax deduction that is based upon the amount expected to eventually go to the charity. The more cash flow the donor wants from the trust, the less that is expected to go to charity and the smaller the charitable tax deduction.
In addition to the upfront deduction upon funding there are additional tax benefits. Most of the time, these trusts are funded with appreciated securities. When the trust sells these securities, the gain is not immediately taxed. Instead, a portion of the gains is allocated to the cash flow paid to the donor. This results in the taxes on the gains being paid over an extended period and a portion of the income stream being taxed at lower capital-gains rates.
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There are costs to establish and maintain a CRT. For example, unlike a common revocable living trust, the trust must file its own tax return to properly allocate items like the capital gains, interest, and dividends to the income beneficiary. Any amount that a qualified charity receives is not taxed. Similar tax treatment for the initial donation and income streams apply to other charitable vehicles.
A second vehicle that is similar to a CRT is a Charitable Gift Annuity (CGA). Like most CRTs, an income stream is paid to the donor (or donor and spouse) for life. Unlike a CRT where the donor determines the income stream subject to certain limits, the income stream from a CGA is a fixed amount based on actuarial tables. CGAs are also funded with an irrevocable gift but are much easier to establish than a trust and all maintenance activities are handled by the charity. A CRT can run out of money if the assets in the trust do not earn enough. CGAs are guaranteed to continue to pay the income stream, but that guarantee is made by the charity itself, so these are typically only offered by larger organizations.
The third vehicle, a Charitable Lead Trust (CLT), is the reverse of a Charitable Remainder Trust. Here the income stream is paid to the charity and after the specified term, any remainder is paid to the designated remainder beneficiary, usually the family of the donor. Donations to a CLT are irrevocable and can be a good choice for families that want to see their charitable dollars at work while living yet still leave some inheritance.
I left a lot of details out of each of these descriptions so again, I recommend you consult your advisers if the basic structure of these vehicles appeals to you.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
