The holiday season is here. For many Americans, that means giving to their favorite charitable cause. In fact, a recent survey found that 63 percent of Americans donate to a charity in the last two weeks of December. More than 75 percent of those donations go to either churches, poverty-related charities or children’s causes.1
If you’re passionate about supporting charity, you may be looking for ways to make a lasting impact. Perhaps you would like to use a portion of your assets to leave a charitable legacy that will help others for years or decades to come.
A charitable remainder trust is an effective tool that can help you leave an impactful, charitable legacy and also meet some important financial objectives. You can use a charitable remainder trust to generate lifetime income and also to minimize tax exposure.
Is a charitable remainder trust right for you? That depends on your unique goals, needs and objectives. However, it may be worth considering as part of your overall legacy strategy.
How does a charitable trust work?A charitable remainder trust is a legal document that facilitates the sale and transfer of your assets to a charitable organization. It’s usually used in conjunction with assets that have appreciated significantly in value over time and could create a sizable tax liability.
You start by identifying the charity and creating the trust document. You then transfer ownership of specific assets from yourself to the trust. The trust can sell the assets and use those funds to create a diversified portfolio that’s aligned with your needs and goals. The trust then pays you income over a set period of time, usually the remainder of your life. Upon your death, the trust assets are transferred to the designated charity according to your instructions.
There are several tax benefits to this type of structure. First, the trust isn’t taxed on the sale of the assets because they are ultimately intended for charity. That means you could place a highly appreciated asset in the trust and minimize your tax exposure. Second, you also may realize a current income tax deduction for contributing assets to the trust, as they’re considered a charitable donation. A tax professional can help you determine exactly how you might benefit.
How does it generate income?Remember, the trust doesn’t transfer your assets to the charity until after you pass away. In the meantime, the trust pays you annual income. The amount of income depends on the type of trust you establish.
You can set up your trust to pay you a level income amount every year. The income amount stays the same regardless of what happens to the value of the trust assets. This type of arrangement can offer predictability, but there can also be drawbacks. If the trust assets decline in value, your income could become problematic and may deplete the trust value.
An alternative approach is to take a fixed percentage of the trust value each year as income. The trust value is reassessed at the beginning of every year, and your income is adjusted accordingly. Your income may not be predictable from year to year, but it will stay proportionate to the overall value of the trust. If the trust value increases, so will your income. if the value declines, your income will decline, too.
Is it right for everyone?A charitable remainder trust isn’t for everyone. One of the biggest drawbacks is that it’s irrevocable. That means you can’t get the assets back out of the trust, even if you change your mind after the fact. Before you establish a charitable trust, make sure you won’t need the assets in the future.
There are a number of risks that could arise through retirement, including the need for long-term care or costly medical care. Develop a plan to address those risks before donating assets to charity. It’s possible that there may be other charitable actions you could take that are more appropriate for your needs and goals. A financial professional can help you develop the right strategy for your objectives.
Ready to develop your charitable plan? Let’s talk about it. Contact us today at Carstens Financial Group. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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