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Giving to charities has wide payoff
You can tie a ribbon around the whole package.
A charitable trust offers many benefits for you, giving you a partial charitable deduction, and a way of providing income to yourself or other income beneficiaries.
Once the gift has been made it provides the charity the principal balance at the end of the right to receive money by the income beneficiary.
With most charitable trusts, either you or one of your beneficiaries receives income for a certain amount of time or for their life.
A great advantage of a charitable trust is that the property that is transferred to the charitable trust avoids capital gain treatment.
For instance, if you have stock that you have held for more than one year that has a large gain on it, it can be donated to the charitable trust without you having to pay tax on the gain.
The charity can turn around and sell the stock and not have to pay the capital gains tax on it.
Where there is a large gain involved, this can save a considerable amount of money.
This assumes, because of Alternative Minimum Tax, there is no benefit to the taxpayer for the California tax paid.
By giving the stock to the charitable trust and having the trust sell the security or securities this tax would be avoided.
On $100,000 gain, this could mean a savings of $25,000.
The same type of savings can be achieved if you were to give real estate or land that qualified for capital gains treatment to the trust.
When the trust sold the property, it would not be subject to the capital gains tax and the savings would be achieved.
In addition to the capital gains tax savings, you would get an immediate income tax charitable deduction for the gift.
The amount of the deduction available to you is based on the principal amount of the gift made and the income that is to be paid to the beneficiary along with the length of time that it is to be paid for.
For example, assume a couple ages 65 and 64 set up a Charitable Annuity Trust in the amount of $200,000.
Charitable deduction
An annuity trust means they will get a fixed amount of income for the rest of their lives.The provisions of the trust provide for $14,000 in payments of income to continue until the last one dies.
Because they are receiving annuity each year, they would be entitled to a current charitable deduction of approximately $37,000 on their tax return instead of the $200,000 put into the trust.
If they did not have enough income to deduct this all in one year, they would be able to deduct a portion of it this year and the remainder would carry over for five years.
Assuming the $200,000 gift to the charitable trust would have been subject to a capital gains tax of 25 percent or $50,000, this would have, in effect, allowed them to make a $200,000 gift at a cost of only $150,000.
They would also receive a charitable deduction of $37,000, saving them a potential $14,000-$15,000 in income taxes.
In addition to the tax savings, they will receive their annuity based on the full $200,000 value of $14,000 annually.
There are many variations to the type of trusts that are available; this example used the Charitable Remainder Annuity Trust in which the payout was fixed.
The Charitable Remainder Unitrust is similar except instead of a fixed amount; the payout varies each year based on the fluctuating value in the trust. There is an opportunity that if the value of the trust increases due to wise investments, then the payout each year will also increase.
Pooled Income Funds are available, however your control over these funds are considerably less.
The Pooled Income Fund consists of donations made by several donors and operates much like a mutual fund would. A Charitable Lead Trust is another twist. In the Charitable Lead Trust, the charity gets the income first and the noncharitable beneficiary gets the remainder interest.
With careful planning, many options are available with these trusts.
They can provide secured income, charitable intent, and tax deductions all at the same time.
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