Setting up a charitable trust can be a great way to maintain investment income for yourself while benefiting the charity of your choice.
The most common type of charitable trust is a charitable remainder trust, which pays an income to you for a fixed time period -- or throughout your life -- at your discretion, then reverts to the charity of your choice upon your death.
If you're considering this an alternative as you transition your wealth, be sure to talk to tax and legal experts and keep in mind both the pros and the cons that may impact your decision.
Pros of a Charitable Trust:
- A charitable remainder trust allows you to donate generously to the charities of your choice, while providing a tax break for yourself and your heirs.
- In this type of trust, the charity itself acts as trustee, managing or investing the property so it produces income for you.
- The charity pays you (or whoever you designate) for a specific time period determined by you. Upon your death -- or at the end of the designated time period -- the property goes to the charity. No federal tax on the property donated to charity.
- You may be able to spread the income tax deduction over five years for the value of your gift.
- If you own property that has appreciated in value, the charitable trust may allow you to turn that increase into cash without paying capital gains tax on the profit. The selected charity may choose to sell any non-income-producing assets in a charitable trust to buy property that does produce income, but since charities don't pay capital gains tax, the proceeds remain in the trust untaxed.
- You can choose to receive a consistent income amount from your trust each year. Or you may choose instead to set payments as a percentage of the current value of the property.
Cons of a Charitable Trust:
- A charitable remainder trust is not suitable for small contributions, since it has to be large enough to provide income for you while retaining enough value to benefit the charity.
- You will transfer legal control of your property to the charity of your choice as trustee. This means the charity makes investment and management decisions regarding those assets without input from you.
- To achieve the desired tax treatment a charitable trust must typically be irrevocable, so you won't be able to change your mind about the amount or the recipient once it's finalized.
- Most people won't realize any value from estate tax benefits, since estate taxes are only assessed on large estates.
- The value of your charitable gift may be reduced by the income you receive during your chosen time period.
- Though you decide how much income you want to receive from your trust, higher payments may reduce your allowable income tax deduction. Higher payments could eat into principal and leave nothing for the charity.
You can choose to place various types of assets into a charitable remainder trust including cash, real estate, securities, valuables, and shares in a corporation, without being subject to a gift tax. But of course, as with any significant financial decision, you'll want to talk with your private banker -- as well as a legal advisor and family members -- to be sure you understand the complexities and the implications of your decision.
The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or financial advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates.
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