In this section: Avoiding capital gains taxes. Maximizing the value of apprecitated assets. Helping a charity while helping yourself. Charitable Remainder Trusts - A Win - Win Plan. Charitable trusts are an excellent planning tool for maximizing income during the client's life and benefiting charities at death. "Wait a second. I don't want to give anything to charity." you say. "I want my assets to go to my children when I die." Such sentiment is not uncommon among my clients, however, the charitable remainder trust deserves a closer inspection. This planning vehicle can often time be a fantastic way to have your cake and eat it too. The person setting up the trust wins by avoiding capital gains taxes on appreciated assets. The charity wins when it receives the assets some time in the future. The only loser is the IRS. A charitable remainder trust is a trust that makes payments to you for a term of years or for life. At the end of the term, the property that remains in the trust is transferred to a charity chosen by the client. In a nutshell, the trust functions much like an annuity retirement plan, with the two added benefits of capital gain tax avoidance, and a charitable income tax deduction. Simply, once you transfer property to the trust, the trust pays to you for your life and the life of your spouse, a predetermined amount (either a variable or a fixed percentage). When you and your spouse finally die the charity gets the property you transferred to the trust. Along the way you don't lose any value due the capital gains hit, plus you get a tax deduction on your present income tax return. Finally to top it all off, we can, through the use of another planning technique, replace the amount of the transfer made to the trust so your heirs inheritance is not diminished. Sounds too good to be true, but it isn't. How does it work? It may seem complex at first but it is not really all that hard to understand if you break the process up into its component parts: First thing is to see if you are a good candidate for this kind of planning. Generally, if you have highly appreciated property (real property or stocks for example) and/or you are in a position where you will owe the government taxes upon your death because your total estate when you die will be over $600,000.00 when you die, then a charitable remainder trust makes sense. Next is the creation of the trust itself. The provisions of the trust will either set up what is called a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). I personally think all the letter stuff is confusing, but you may see them referred to as CRAT's and CRUT's elsewhere in your research. The unitrust provides a variable income based upon a percentage of the charitable gift, and is usually paid on a quarterly basis. The annuity trust is a fixed amount per month. After the trust is in place you transfer the gift to the charitable remainder trust. This can be as easy as signing a quit-claim deed to the trust's name. This transferred property is then used to generate the income for you the "donor". The trust then takes this property and may convert it into more liquid assets with greater income producing ability. Many clients don't want to lose the value of the gift that they make to the charitable remainder trust. They don't want to deplete their children's inheritance. So, in order NOT to lose that value and make sure that the children's inheritance stays in tact we use a wealth replacement trust, which functions exactly like a irrevocable life insurance trust. This works by taking some of the monthly income generated by the trust and using it to purchase a life insurance policy on the client's life. When the client dies, the policy replaces the approximate value that was given to the charitable trust. Here is an example of how the charitable trust works: (See figure below for a graphic.) 1. The client transfers the appreciated property to the trust. If he were to sell the property his return on the investment would be greatly reduced by the effect of the capital gains tax he would have to pay. The real property is instead transferred to the trust. The client gets an income tax deduction for this "gift" to the charity. Remember, though that the charity will not get the asset until the client dies. 2. Next the trust takes the real property and sells it so it can make investments to produce income for the client. The trust does not have to pay capital gains tax, so it can use the entire sale amount to invest. 3.The trust then pays a monthly income to the client for his life out of these invested funds. 4. When the client dies, the remaining amount in the trust goes to the charity. Summary of a Charitable Remainder Trust The Pros Provides tax benefits. Chartiable Remainder Trusts provide for a present income tax deduction for Federal income tax purposes. Avoids capital gains taxes. A Chartiable Remainder Trusts allows for the sale of appreciated assets by the trust without Federal income tax on the gain. State and local taxes may also be avoided. This results in more money available to be reinvested and, ultimately, a longer income stream to the income beneficiaries (either you or your designated beneficiaries). Achieves tax-free accumulation of earnings. Income from a Chartiable Remainder Trust is taxable only to the extent it is distributed to the income beneficiaries. Undistributed capital gains or earnings in the trust accumulate tax-free. Provides tax-favored spendable income. The avoidance of capital gains allows the trustee to reinvest the entire principal amount generated from the gifted asset. Allows for diversification of investments. A Chartiable Remainder Trusts that sells the appreciated assets avoids immediate capital gains taxes. The proceeds from the sale can then be reinvested in a more diversified or higher-yielding income-producing investment portfolio. The Cons There are two "downsides" to a charitable trust. The payments to the income beneficiary, are limited to the amount set forth in the trust instrument. No additional distributions can ever be made to the income beneficiary, no matter what the need may be. This means that you can never get to the assets that you place in the trust, only the monthly income that they generate. When income beneficiary dies, the trust property passes to charity, not to the income beneficiary's children or other beneficiaries. Sounds bad, but remember if the income from the trust is used to purchase a life insurance policy, insuring the lives of the income beneficiary, the insurance proceeds replaces in whole or in part the amount that was given to charitable trust. This means that the kids get the same amount of assets, only they receive it in cash and without any estate taxes being taken out. We call this the wealth replacement option.

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