By Bryan Lee, CFP®, MBA
American author H. Jackson Brown Jr. said, “Remember that the happiest people are not those getting more, but those giving more.” It sounds like most of us would be wise to take this sentiment to heart as we’ve been experiencing quite a bit of unhappiness in the last 18 months or so. The desire to give generously is a noble one, and it is important to find the correct balance between taking care of yourself and your desire to help make the world a better place. You want to give a portion of the wealth you’ve accumulated, but you must be discerning to ensure that you won’t outlive your money and end up needing charity yourself. One solution to this dilemma is a charitable remainder trust.
Benefits of a Charitable Remainder Trust
A charitable remainder trust allows you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You will receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself, and you even gain creditor protection for it. It also provides other important tax benefits and, best of all, you get to contribute to charitable causes that are near and dear to your heart.
How Charitable Remainder Trusts Work
How can a simple trust do all of those great things? This is how: The first step is to set up an irrevocable trust where you are the income beneficiary, and when you pass away, the remainder goes to the charity or charities of your choice.
Next, you transfer assets to the trust. Ideal assets for this arrangement are those that have greatly appreciated in value since you purchased them. The best are publicly traded securities, real estate, and stock in some closely held companies. S corporation stock and mortgaged real estate do not qualify. Because the remainder beneficiary of the trust is a charity and the trust is irrevocable, you get an immediate charitable deduction for the asset contributed (minus the actuarial value of the income stream retained) on your income taxes. The charitable deduction is limited to 30% of AGI for appreciated assets, but any excess would be carried forward under current law.
Once you have transferred the asset, the trustee will sell it. They do not have to pay any capital gains tax and can reinvest the proceeds in an income-producing asset. For the rest of your life, that income is paid to you, and your charity gets the rest when you pass away (or after a certain number of years, depending on the terms of the trust created).
Why Charitable Remainder Trusts Are Used
Why do you need a trust to do this? Why can’t you simply sell the asset yourself, keep the income, and pass the proceeds to a charity in your will? You can, but it will cost you. Utilizing a charitable remainder trust provides important income tax benefits which can save you money, especially if you have a tax year with unusually high income. Also, if you hold the investment, it might be subject to creditors’ claims; if it is held in trust, creditors generally cannot access it.
How We Can Help
This is just a brief overview of charitable remainder trusts, but they can be tailored to specific situations. You can choose to receive a fixed income or one that matches the investment’s performance. You can choose the beneficiaries of the trust, whether it is yourself, your spouse, children, or grandchildren. You can also put off collecting the income if it’s not needed right away. Given the proposed tax law changes, it might be best to wait until 2022 to set up the charitable remainder trust, but it’s never too early to begin planning.
If giving generously to the causes you care about brings you happiness, a charitable remainder trust may be a wise addition to your financial and estate plan. If you want to learn more about how this gifting strategy may help you meet specific financial goals, Strategic Financial Planning can help. Let’s align your finances with your vision and values. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ AND CFP®.Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.