Planning to Provide for a Charity from Your Estate? Consider a Charitable Remainder Trust
Many families consider providing a portion of their estate to a charitable organization upon their death. For example, let’s look at the Hilton Hotel chain. The Hilton hotel was first started by Conrad Hilton in Texas and grew to become an international company. When Mr. Hilton passed away, he left the bulk of his estate to the Conrad N. Hilton Foundation— a charitable foundation that Mr. Hilton founded several decades earlier. Conrad’s son, Barron Hilton, who took over operation of Hilton Hotels following Conrad’s death, also planned his estate so that approximately $2.36 billion (roughly 97% of his estate) would be transferred from his charitable trust to the Conrad N. Hilton Foundation.
Although, most of have not amassed a level of wealth the size of the Hilton family, many of us feel a sense of obligation to provide for charities at our deaths. One way to provide for distribution to a charity at your death is with a charitable remainder trust.
Some of you may be wondering, “why did the Hilton’s create a charitable foundation rather than gifting their wealth outright to these charities?” Well, there is a good explanation for their decisions. With a charitable remainder trust, it provides income tax savings, tax deductions, and more importantly, results in more money getting in the hands of the charity.
What is a Charitable Remainder Trust?
A charitable remainder trust is an estate planning tool where the individual creates an irrevocable trust and funds the trust with various types of assets. The individual (or donor) loses control of the trust and another individual or company, the trustee, manages the trust. The trustee then makes contributions from the trust to the charity or charities for a specified number of years as stated in the trust document. At the end of the predetermined number of years, the remaining trust assets are then distributed outright to the named charities in the trust (the beneficiaries).
Benefits of a Charitable Remainder Trust?
Again, you may be wondering, why an individual would set up their estate to make a distribution to charities in this way? First, the individual who created the trust (the donor) receives an immediate income tax deduction for the future gift. Also, when assets have been transferred to the trust, the trustee does not incur any tax liabilities from the sale so that money can be distributed to the named charities. This results in more funds ending up in the hands of the charity.
John transfers 200 shares of Apple Stock to the John Charitable Remainder Trust. The trustee, Jane, decides to sell the shares for the going price of $250,000. Although John originally purchased the shares for $50,000, and the sale would typically subject John to capital gains taxes on the $200,000 gain, this sale is completed tax free and the full $250,000 is transferred to the named charities when the trust terminates.
A final and very important aspect of a charitable remainder trust is that the creator (the donor) of the trust can be named, under certain circumstances, as the lifetime income beneficiary. Under these circumstances, the creator of the trust can be paid an annual fixed amount of money equal to a percentage of the assets that have been transferred into the trust.
This can create a favorable estate planning strategy for families. This strategy can create the situation of providing for these named charities over several years instead of all at once. Doing so eliminates capital gains tax on the sale of appreciable assets in the trust. Additionally, more money ends up in the hands of the named charities and provides you and your family with lifetime income from the trust on an annual basis, thereby reducing the size of your taxable estate at your death.
As you can see, there are several reasons to establish a charitable remainder trust. They are not just for the Hilton family and other multi-billionaires of the world. All of us have reasons for wanting to donate to charities, and the charitable remainder trust provides a unique estate planning vehicle to eliminate taxes and ensure that more funds end up in the hands of the charity or charities.
For More Information
If you have questions regarding charitable remainder trusts and how to structure your estate planning so that you provide a gift to the charity or charities of your choice, then please contact our office for a complimentary visit so that we can discuss your estate planning needs.
We look forward to hearing from you!