Many of you remember when interest rates on your certificates of deposit (CDs) were earning anywhere from 10-15% annually. Well, with the use of some charitable giving techniques, you may be able to convert a significant amount of your wealth into income producing assets, as substantially higher rates may be obtained than those possible through more traditional vehicles, such as a CD or savings account.
One tactic is to establish what is known as a charitable lead trust. With this type of trust, assets are placed in it, and you will receive a charitable deduction for a portion of the funds contributed or donated, since it has a charitable purpose. This would become significantly attractive for stocks that have a substantial increase in value since purchase. In this situation, the charity will receive a rate of return that you set, and all involved will hope that the rate of return actually recognized by the trust will be greater than the amount paid out. Income received by the charity during the your lifetime, as the donor, or for a period of years, will be set at the initiation of the trust, but all remainder amounts left when the trust terminates will pass your (donor’s) family, be it children, grandchildren, etc. When the funds are distributed, they are basically tax free to the recipients.
A similar trust is a charitable remainder trust. Here, appreciated assets are contributed to the trust, and when sold, some capital gains are recognized, but you will receive a charitable deduction on your tax return for a portion of the funds contributed. In this case, the income from the trust is recognized by you (the individual donor) or your family during lifetime, and the remainder passes to charity.
Based on the current allowable rates by the Internal Revenue Service, you are entitled to receive a rate of return based on your age, and this ranges from approximately 6% for a person in their 60s to over 9% for a person in their 80s. In some cases, there may not be sufficient income to pay the funds out to the charity when the trust is to terminate, and therefore, so long as the “testing” of the amounts passes for IRS purposes, the trust is allowable and may pay less money to the charity at the termination, but distribute more money to the family on a tax free, or at least, a lower tax bracket than otherwise would have been taxed.
A similar opportunity is available, provided by many charities, known as a charitable gift annuity. This is very similar to a charitable remainder trust, although there is no trust established, but merely a relatively straightforward document where you can give money to a charity, and in return receive an annuity for a certain period of time, or possibly throughout your lifetime. Again, you will receive a payment based on your age, (and the interest rate for an older person is greater than that of a younger person) and in most cases, the money returned to you will be substantially greater than what you could receive from a CD, money market account, or a similar asset that does not fluctuate with the market. Some people determine that they really don’t need the income from time to time, and they gift it to the charity, thus allowing a larger income tax deduction for that year.
Most national charitable organizations, such as the American Cancer Society, American Heart Association, and most colleges, universities, and hospitals have planned giving officers who would be pleased to assist with the preparation of this type of gift. Most also have software that will calculate the income tax consequences of making a gift as well as the estate and gift consequences if the you request that information. With the gift annuity, it is usually not necessary for you to obtain legal and accounting assistance, but in most cases, professional should be consulted ensure that the proposal is in the your best interests and that the appropriate assets are being contributed to the gift annuity.
Hyman G. Darling, Esq.
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