Charitable Trusts and Annuities

Discover how to maximize your giving by using

charitable giving methods that allow you to grow

your donation through investment.

 

Maximize your donation

Contributing part of your estate to charity may be something that you and your family strongly believe in, whether or not you receive any benefit from it. Although generosity is the driving force behind philanthropy, there are also many benefits that a donor can reap from making charitable contributions. Philanthropy is an important aspect of generational wealth transfer because it allows you to earn income tax deductions and to transfer money out of your estate to avoid additional estate taxes. Using charitable giving methods, such as trusts and annuities that allow you to grow your donation through investment, are a beneficial way to maximize what you can give. By learning about ways to donate to charity other than through direct gifts, you can make sure that you donate in the way that contributes the most efficiently, both to charity and to your generational wealth transfer.

Charitable gift annuities (CGAs)

One way to grow your donation to charity is with a charitable gift annuity. With a normal annuity, donors fund the annuity with an initial payment, this payment receives gains from investment and then the donor is paid a fixed income throughout the year using this money. With a CGA, the charity, rather than an investment firm, serves as the management company, and any profits the investment earns go to the charity rather than the donor. CGAs usually have lower return rates than other annuities, but can compensate for these low returns through the tax benefits that they offer. The charitable donation deduction amount is equal to the present value of the charity’s “remainder interest” of the donation, or the excess of the fair market value of the donation over the present value of the annuity. This allows the donor to receive an income tax deduction as well as a portion of the donation back through annuity payments.

As with any investment, CGAs do have some downsides. They can tie up a large portion of your retirement funds and are costly to terminate outside of their set term. Before you enter into a CGA, you should be completely sure that you will not need the funds you are contributing in the immediate future. CGAs can also be risky because they will terminate if the charity you donate to goes bankrupt. In order to avoid this, it’s crucial to research the charity you will donate to and make sure that it is financially stable.

Charitable remainder trusts (CRTs)

CRTs are another method used to grow charitable donations through investment. The donor makes an initial donation to the trust, which then makes annual distributions to a beneficiary (usually the grantor) and gives the remainder to the chosen charity. CRTs offer more security than CGAs because they don’t make the donation until the end of their term, so donors can give to smaller and potentially less stable charities without putting their income at risk.

CRTs offer many tax benefits, including an income tax deduction and the fact that the trust itself is not taxed for income. However, the beneficiary is taxed on any income distributed to him/her. CRTs are especially attractive for avoiding estate taxes, as they offer a full estate tax deduction if created at the grantor’s death. When considering CRTs, grantors should keep in mind that they are required to distribute between 5 and 50 percent annually to the beneficiary of the trust.

Charitable lead trusts (CLTs)

CLTs are very similar to CRTs, except that they make their annual distributions to the charity and hold the remainder for the grantor or beneficiary instead of the other way around. If the grantor receives the remainder, it is referred to as a “grantor trust,” while if a beneficiary or third party receives the remainder, it is referred to as a “non-grantor trust.” Grantor trusts offer an income tax deduction, while non-grantor trusts provide an estate tax deduction. Additionally, with a grantor trust the grantor is taxed for income not given to the charity, while with a non-grantor trust the trust itself is taxed for this income. Grantor trusts are usually used if an individual wants to donate during his or her lifetime, while non-grantor trusts are used to provide a gift to an individual’s family after his or her death while still providing money to charity.

Annuities vs. unitrusts

CRTs and CLTs both come in two different forms, annuity and unitrust. The only difference between the two is how annual payments are calculated. With CRATs (charitable remainder annuity trusts) and CLATs (charitable lead annuity trusts), the beneficiary receives annual payments of fixed dollar amounts. With CRUTs (charitable remainder unitrusts) and CLUTs (charitable lead unitrusts), the beneficiary receives annual payments at a fixed percentage of the trust’s value for that year. CRATs and CLATs offer more consistency, while CRUTs and CLATs give the beneficiary the opportunity to potentially receive larger (or smaller) payments depending on the trust’s value that year.

Choosing a giving method

Charitable trusts and annuities can allow you to make a larger contribution to charity than a simple gift, because they allow your money to grow over the trust’s term. However, these options can be expensive and difficult to manage. They also create an extended timeline, which delays the full benefit of your donation from reaching the charity until a number of years have passed. Before committing to one of these methods, weigh the pros and cons to confirm that the strategy you pick fits with your generational wealth transfer plan.

 

This article was written by Advicent Solutions, an entity unrelated to Axial Family Advisors. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Axial Family Advisors does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Advicent Solutions. All rights reserved.