Tatia D. Barnes, Esq.
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Tatia D. Barnes, Esq.

Serving Your Probate, Administration and Estate Planning Needs

The Charitable Trust

12/1/2014

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Give to charity and get a tax benefit. A charitable trust lets you donate generously to charity, and it gives you and your heirs a big tax break. However, if you just want to make a few small charitable gifts, then a charitable trust probably isn't worth the bother.

You need to do some serious thinking before you set up a charitable trust. Charitable trusts require that that you give up legal control of your property, and charitable trusts are irrevocable -- once the trust becomes operational, you cannot change your mind and regain legal control of the trust property.

How It Works The most common type of charitable trust is called a charitable remainder trust. Here's how it usually works.

First, you set up a trust and transfer to it the property you want to donate to a charity. The charity must be approved by the IRS, which usually means it has tax-exempt status under the Internal Revenue Code.

The charity serves as trustee of the trust, and manages or invests the property so it will produce income for you. The charity pays you (or someone you name) a portion of the income generated by the trust property for a certain number of years, or for your whole life -- you specify the payment period in the trust document. Then, at your death or the end of the period you set, the property goes to the charity.

What's in It for You -- Tax Advantages In addition to helping out your favorite charity, you get several big tax advantages from this arrangement.

Income Tax You can take an income tax deduction, spread over five years, for the value of your gift to the charity. Where things get tricky is determining the amount of your deduction. The value of your gift is not simply the value of the property; the IRS deducts from that value the amount of income you're likely to receive from the property. For example, if you donate $100,000 but can expect to get $25,000 in income back (based on your life expectancy, interest rates and how the trust document is set up), the value of your gift is $75,000.

Estate Tax When the trust property eventually goes to the charity outright (at your death or the end of the payment period you specified), it's no longer in your estate -- so it isn't subject to federal estate tax. (Most people don't need to worry about estate tax, however, because it is assessed only on large estates. )

Capital Gains Tax With a charitable trust you can turn appreciated property (property that has gone up significantly in value since you acquired it) into cash without paying capital gains tax on the profit.

A charity usually sells any non-income-producing asset in a charitable trust and uses the proceeds to buy property that will produce income for you. Because charities, unlike individuals, don't have to pay capital gains tax, if the charity sells your property, the proceeds stay in the trust and aren't taxed.

Example Toni owns stock worth $300,000. She paid $20,000 for it 20 years ago. She creates a charitable trust, naming Greenpeace as the charity beneficiary, and funds her trust with her stock. Greenpeace sells the stock for $300,000 and invests the money in a mutual fund. Toni will receive income from this $300,000 for her life.

Had Toni sold the stock herself, she would have had to pay capital gains tax on her $280,000 profit. But no capital gains tax is assessed against the charity.

Receiving Income From the Trust When you set up a charitable remainder trust, there are two basic ways to structure the payments you will receive.

Fixed Annuity

You can receive a fixed dollar amount (an annuity) each year. That way, if the trust has lower-than-expected income, you still receive the same annual income. Once you set the amount and the trust is operational, you can't change it. For instance, if you direct that the charity pay you $10,000 a year for life, you can't later say, "Oops, I forgot about inflation. How about $15,000?"

Theoretically, you can make the payments as high as you want. Practically, however, there are limits. First, the higher the payments, the lower your income tax deduction. Second, high payments might eat into principal, possibly even using it all up before the payment term is over and leaving nothing for the charity. Third, a charity is unlikely to accept a gift if it is likely, or even possible, that all the trust property will be paid back to you.

Percentage of Trust Assets

It's common to set your annual payment as a percentage of the value of the current worth of the trust property. For example, your trust document could specify that you will receive 7% of the value of the trust assets yearly. Each year the trust assets will be reappraised, and you will receive 7% of that amount.

Because you receive a percentage, not a flat dollar amount, if inflation (or wise investment) pushes up the dollar value of the assets, your payments go up accordingly. Under IRS rules, you must receive at least 5% of the value of the trust each year.

To start planning your charitable trust today, you can download The Wise Donor's Guide to Giving to Charity, by Mary Randolph (Nolo).

© 2010 Nolo
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TATIA D. BARNES, ESQ.
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New York, New York 10005
​(212) 537-4069
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  • Home
  • Probate
  • Estate Administration
    • Estate Administration List For Clients
  • Estate Litigation
    • Surrogate Court Citations
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  • Estate Planning
    • Power Of Attorney
    • Living Will - Health Care Proxy
    • Wills
    • Trusts
    • Estate Planning List For Clients
  • Planning For Elder Care Issues
  • Long Term Care Planning
  • Special Needs Planning
  • Contact
  • About
    • Blog
    • Fees
    • Philosophy
    • Disclaimer
  • Client's Rights
  • Helpful Estate Terms
  • Resources
    • New York Dead Man's Statute - CPLR 4519
    • EPTL 3-3.5 Conditions Qualifying Dispositions - Conditions against contest
    • EPTL 4-1.1 INTESTATE SUCCESSION
    • EPTL 5-1.1 A - Right of Election By Surviving Spouse
    • EPTL 5-1.2 - Disqualification as surviving spouse
    • EPTL § 5-3.1 Exemption for benefit of family
    • EPTL 7-1.12 Supplemental Needs Trusts
    • EPTL § 10-6.6 Exercise of a Power of Appointment
    • MHL 81.36 Discharge or Modification of Powers of Guardian
    • NY General Obligations Law 5-1513 Power of Attorney statutory short form
    • NY Mental Health & Hygiene Law 81.02 Power to appoint a Guardian
    • SCPA § 207. Lifetime trusts; jurisdiction and venue
    • SCPA 302 - Pleadings
    • SCPA 406 Reference to Hear and Report
    • SCPA 306 Citation
    • SCPA 407 Assignment of Counsel For Indigent Persons
    • SCPA 503 Proceedings Upon Jury Trial
    • SCPA 507 Testimony of Witnesses
    • SCPA 707 Eligibility to Receive Letters
    • SCPA 711 Suspension, modification or revocation of letters or removal for disqualification or misconduct
    • SCPA 719 In what cases letters may be suspended, modified or revoked, or a lifetime trustee removed or his powers suspended or modified, without process
    • SCPA 1301 Definition of a small estate
    • SCPA 1403- Persons to Be Served - Content of Process
    • SCPA § 1404 - Witnesses to be Examined; proof required
    • SCPA § 1501 Application Of Act To Trust
    • SCPA § 1502 Appointment Of Trustee
    • SCPA § 1505 Proceedings When Testamentary Trustee Is Also Executor or Administrator
    • SCPA 1602 - Ancillary Probate Based on Domicilary Probate
    • SCPA 1604 - Ancillary letters on foreign will
    • SCPA 1607 Ancillary Letters of Administration
    • SCPA 1609 - Petition for Ancillary Letters
    • SCPA 1811 Payment of Debts and Funeral Expenses
    • SCPA 1802 Effect of failure to present claim
    • SCPA 2003 Opening Safe Deposit Box
    • SCPA 2102 Proceedings For Relief Against A Fiduciary
    • SCPA 2204 Judicial settlement where recovery has been had in negligence action
    • SCPA 2205 Compulsory account and related relief on a court's own initiative or on petition who may petition
    • SCPA 2206 Compulsory Account and Related Relief; Proceedings Thereupon
    • SCPA 2208 Voluntary Account; who may petition
    • SCPA 2210 Voluntary Account - Process
    • SCPA 2225 - Kinship Proceedings
    • SCPA 2307 Commissions of Fiduciaries Other Than Trustees
    • Estate Tax Return - New York Tax Law 941
    • Tax Law 971-a
    • Tax Law 972
    • 26 USC § 2042
    • Unified Credit Against Estate Tax 26 USC 2010
    • 26 CFR 1.401(a)(9)-3 - Death before required beginning date
    • 26 CFR 1.401(a)(9)-4 - Determination of the designated beneficiary
    • Petition For Review of a Deficiency - Tax law 998
    • Abatement
    • Accounting Proceedings
    • Ademption
    • Administrator
    • Administration
    • Anticontest clause
    • Ancillary Proceedings
    • Article 17a Guardianship
    • Article 81 Guardianship
    • Asset
    • Attorney-in-fact
    • Beneficiaries
    • Bequest
    • Bond
    • Bypass Trust
    • Capacity
    • Citation
    • Codicil
    • Contest
    • Contingent Beneficiary
    • Dead Man's Statute
    • Debts of a Decedent
    • Decedent
    • Devise
    • Disinherit a Beneficiary
    • Disinheritance Clause
    • Distributee
    • Elective Share
    • Estate
    • Estate Litigation
    • Executor
    • Family Exemption
    • Fiduciary
    • Final income tax return
    • Gift
    • Grantor
    • Guardian
    • Heir
    • Insolvent Estates
    • Intestate
    • In terrorem clause
    • Joint Tenancy With Right of Survivorship
    • Kinship Hearing
    • Legacy
    • Life Planning
    • Legatee
    • Movant
    • Objections
    • Order to show cause
    • Person
    • Personal representative
    • Per Stirpes
    • Post-Deceased Distributee
    • Pre-Deceased Distributee
    • Priority of Paying Claims Against An Estate
    • Probate
    • Property
    • Residuary Estate
    • Small Estates And NY Surrogate's Court
    • Tenants in common
    • Termination of Decedent Lease
    • Testamentary Trust
    • Testator - Testatrix
    • Unclaimed Assets
    • What is a Will
    • Witness >
      • NAACP v New York
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