When it comes to estate planning, there’s a common misconception that, when it comes to who you leave your wealth to, you must choose between family and charity. I’ve found that many top-level executives would like to leave some of their wealth to a charity, non-profit, or cause they’re passionate about. However, they also want to provide for their families.
The good news is, as an executive financial advisor, I’ve helped many executives implement a strategy that allows them to do both. It’s called a charitable remainder trust. When you establish a charitable remainder trust, you are able to generate income for yourself and your family while you are alive. When you pass on, the trust leverages your remaining wealth to impact the charities of your choice.
Here’s a closer look at this wealth preservation and distribution strategy and when setting up a charitable trust makes sense for your financial and estate plans.
What Is a Charitable Trust?
Let’s start with the basics. A charitable trust is an irrevocable account that is established for philanthropic intentions. It allows you to dedicate assets to be donated to charity while also enjoying some tax benefits, which depend on your income level and some other factors.
There are multiple types of charitable trusts, but the one I find most popular and effective for the executives I work with is the charitable remainder trust. A charitable remainder trust allows you to leverage an asset or multiple assets that have appreciated over the years. It also allows you to reduce income tax while you’re alive and helps your family reduce or avoid estate tax when you pass away. This type of trust generates income for you while you’re alive and automatically donates the remainder to the charitable organization of your choice, making it an effective estate planning tool.
So how does setting up a charitable remainder trust actually work? Here’s the general process. From understanding the process, you can see how establishing a charitable trust can bring you multiple tax benefits.
- You set up the trust. With the help of an estate planning attorney, you first transfer the asset or assets that have appreciated into the charitable remainder trust. At this point, the assets are then removed from your estate, so no estate taxes are due upon your death and those funds are not subject to creditors. These funds are also not considered when factoring the current lifetime gift tax exemption for 2018, giving even more reason to consider a charitable trust. At this point, you also are allowed to take a charitable income tax deduction for the entire amount deposited, depending on your income level. You can deduct anywhere from 20-50% of your adjusted gross income depending on a few different factors. We always recommend you consult with your certified public accountant in addition to an experienced executive financial advisor for questions regarding qualified charitable distribution rules and others that affect your income tax along with your estate.
- You appoint a trustee. You do have some options regarding who you would like to appoint as your trustee. Your knee-jerk reaction might be to place a family member in this role. However, you should remember that part of this role involves taking care of the assets held within the trust when you pass away, which can be a difficult time for your family and friends. A trusted financial advisor, business partner, or estate planning attorney are all options to consider as your trustee as well.
- The trustee sells the assets on your behalf. Because your assets are now held in a charitable trust, you completely avoid paying capital gains tax on those funds when they are sold. The trustee invests the money held in the trust into income-producing assets, which are then used to generate income for your lifetime. When you eventually pass on, the remainder of the wealth you’ve accumulated in your trust is then distributed to the charity or charities of your choice.
What Investment Options Are Available in a Charitable Trust?
When it comes to generating income for you and your family during your lifetime, you have some options within your charitable trust. You could opt to invest in traditional investments that may endure some volatility throughout the years depending on how the markets perform. Or, you could invest in a guaranteed* income-generating asset like an annuity.
When you invest in traditional investments within the charitable remainder trust and draw a set percentage of assets annually, it is then called a charitable remainder unitrust. Your assets would continue to be evaluated on an annual basis in which your income for the year would be determined.
If you invest in an annuity or similar investment within the charitable remainder trust, you opt for a set income level for your lifetime. This type of trust is then called a charitable remainder annuity trust. There are pros and cons to both options, so you want to be sure to work with a trusted wealth advisor to help direct you toward the one best suited for your unique situation.
*Guarantees extend to the claims-paying ability of the issuer.
When Does Setting up a Charitable Trust Make Sense?
The short answer to this question is: Setting up a charitable trust makes sense for you if you want to leave a portion of your wealth to a charity or philanthropic endeavor that you feel passionate about but still need to generate income for your family while you’re alive.
Many of my executive clients are very active with charitable work and set aside a generous portion of their wealth and income to help others in need. The major benefit of leveraging a charitable remainder trust is that you have the ability to ensure that you and your family will be taken care of throughout your work-optional years, knowing that whatever is left will go on to impact other people’s lives and leave a legacy that outlasts you and your family.
In my experience, if you know you will need any type of income throughout retirement, but you also want to leave money behind to an organization you believe in, a charitable remainder trust is a strategy to consider. It should be a topic of conversation between yourself, your trusted wealth advisor, and an estate planning attorney.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for estate planning and charitable gifts planning for executives. For more information on how Wade and the Carpenter Team can advise you on setting up a charitable trust, reach out today for a complimentary consultation.
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