How We Give To Charities Makes A Difference
The manner of giving is worth more than the gift – Pierre Corneille

How we give makes a difference, especially from a tax point of view. If you pay income taxes, giving cash doesn’t make a lot of sense. There are better ways. Let’s examine a few.

A Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT) may be appropriate for some people. Others should consider establishing a private foundation, a supporting organi-zation, or making a contribution to a donor-advised fund. Each solution has its own specific tax benefits, advantages and disadvantages, depending on your situation.

Charitable Remainder Trusts

Investors who own appreciated property are generally reluctant to sell it and convert it to an income producing asset because they will have to pay 20% in capital gains tax to the Feds plus whatever they must pay to the state in which they reside. To solve this problem, it often makes sense to consider giving these assets away to a charitable remainder trust (CRT). The trustee of that trust (who is usually the donor) can sell the asset(s) with no immediate capital gains tax, yet the investor continues to enjoy income from the gifted property.

A CRT is a trust that has an individual(s) — the investor and perhaps their spouse — as the current beneficiary. The current beneficiary receives a stream of payments from the trust as long as they live. The payments will be an annuity or a fixed percentage of the trust principal each year. The "remainder" beneficiary who receives the property upon the trust’s termination (at the death of the last beneficiary) must be a charity(s).

Each payment to the donor or the beneficiary will be subject to income tax to the extent of the taxable income generated by the trust in a given year. However, if the payment exceeds the trust’s taxable income, that excess may be taxed as capital gains. Because capital gains are taxed at a lower rate than ordinary income, a strategy emphasizing total return rather than mere production of income maximizes a beneficiary’s after-tax income.

Creating a CRT also entitles the donor to a charitable deduction on his or her income tax for the year in which the property is given to the trust. This deduction is based on the property’s appreciated value and is equal to the value of the charity’s re-mainder interest in that property. Hence, the older the current beneficiary, the more valuable the income tax deduction. With a CRT one can emphasize the benefit of either the income paid from the trust or the income tax de-duction.

Lastly, Charitable Remainder Trusts are generally not subject to estate tax. Considering all of the advantages of CRT’s, you’re looking at the Swiss Army Knife of financial planning.

Charitable Lead Trusts

A Charitable Lead Trust (CLT) is quite similar to a CRT; however, the outcome is the opposite. With a CLT, the donor receives current income tax benefits but the beneficiaries of the CLT are the donor’s heirs.

In a Charitable Lead Trust (also sometimes called a "Charitable Income Trust" or a "Front Trust") the grantor donates cash or an income - producing asset. The trust pays a distribution, according to a formula spelled out in the trust, to the charity for a specified period of time. After that period of time, the principal of the trust is paid to the non-charitable "remainder beneficiary" designated by the grantor. Typically, the remainder beneficiary is a member of the grantor’s family, other than the grantor or his spouse.

The concept here is to pay the in-come from an appreciating asset to a charity because you don’t need it, while retaining the future value for your heirs. This makes the CLT an income tax planning tool and not one for estate planning, as is its cousin the CRT.

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