Article

Charitable trust planning: share your wealth and defer capital gains

Sept. 10, 2021 · Authored by Duncan Campbell

Sure, it feels good not having to pay capital gains taxes, but think about how that would feel on top of giving to a charitable cause.

High-net-worth individuals who are exploring charitable giving have many different options, but charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are two straightforward planning vehicles that will help them realize their giving aspirations among other benefits, including deferring long-term capital gains.

When a donor pursues this path, the decision of which type of trust really comes down to their financial needs: Do they or their beneficiary need the money now or later?

Why choose a CRT or CLT?

First, this type of trust works best for someone who may be coming into a large amount of money (e.g., selling a business for millions of dollars) but don’t need all of that money to live off now. With either a CRT or CLT, they will be able to lessen their tax liability, give to charity and still distribute part of their estate to themselves or their beneficiaries.

Charitable remainder trusts

A CRT is best for people who need an income stream now.

With a CRT, the donor transfers assets to an irrevocable trust. The term of the trust is based on the results from an actuarial program that estimates the donor’s lifespan. The amount and frequency of the income stream distribution to the designated recipient(s) will be determined by the established term in order to ensure the charity receives 10% of the present value of the assets at the expiration of the trust.

At the outset, the donor receives a charitable contribution deduction, but they can also sell assets of the trust at any time without personally generating capital gains. They can even use those proceeds to diversify the trust’s portfolio, which could potentially increase their beneficiary’s income stream as well as the ultimate gift to charity.

The trust’s assets are not transferred to the charity until the term of the trust expires or the income beneficiary dies. This is also a caveat for the donor since the charity will receive the remainder of the trust’s assets no matter when the income beneficiary dies. For example, if the donor only selects one income beneficiary and that person dies unexpectedly the next year, the charity will receive all of the contents of the trust, no matter the term of the trust. The use of life insurance can mitigate this issue.