A Charitable Remainder Trust can give a person the great feeling and recognition that comes with donating to charity during their lifetime while still enjoying the benefit of the income on the donated asset.
To be recognized by the IRS as an exempt entity, the trust has to be approved by the IRS in a 1023 proceeding. Charitable trusts are irrevocable – once the assets are committed to charity, one cannot take them back.
You get to determine the payment period and the amount of payment when you set up the trust. You have the choice of receiving a fixed annuity every year which cannot be changed once the trust has been set up. Or you can set up your trust by receiving a percentage of trust assets. Under the IRS rules, you must receive at least 5% of the value of a trust asset annually. Keep in mind though that when you set up the payments, you want to make it attractive to the charity so that they receive some of the income as well. When you pass away, the charity inherits the entire asset so your estate receives a reduction in estate taxes. All parties benefit.
Take for instance the largest charitable trust in the world, The Bill and Melinda Gates Foundation. This trust will expire 50 years after the Gates’ deaths. After the expiration, the assets, together with any profits or interest, become the property of the charity.
Tax Advantages of a New York Charitable Remainder Trust
By having a charitable remainder trust, you get the following tax advantages:
• You do not have to pay capital gains tax on appreciated property that you transfer to the trust because charities don’t pay capital gains on profits. If the charity sells the property, the money gets reinvested and stays in the trust.
• You receive income on the asset/money while you are alive
• You reduce the value of your estate after you pass away and your estate saves money on federal estate taxes
NYC Charitable Trust Example
Let’s say you own stock worth $500,000 that you paid $50,000 for 25 years ago. You decide to create a charitable remainder trust, and you name the American Cancer Society as the charity beneficiary. You fund the trust with the stock. The American Cancer Society decides to sell the stock later for $500,000. You do not have to pay capital gains taxes on the $450,000 gain. The American Cancer society reinvests the money, and you receive income from the investment while you are living. When you pass away, the American Cancer Society owns the asset, and they don’t have to pay any capital gains taxes either.
If you are interested in setting up a charitable remainder trust, talk with a New York City estate and trust attorney. Call the Law Offices of Albert Goodwin at (212) 233-1233.