Any asset that you place in a charitable trust—cash, stock, or real estate—is invested by the trustee to provide you with income for the rest of your life and, if you wish, continue to provide revenue to your heirs, either for their lifetimes or for a term of years. After the death of all income beneficiaries, what remains in the trust passes to the Museums. The creation of a charitable trust may provide you with some important tax benefits:
- An immediate income-tax deduction for a percentage of your gift. We will be happy to give you an idea of the size of your deduction. We simply need to know the ages of the income beneficiary(ies) and the payout rate of the trust.
- No tax on the sale of appreciated property. From the donor's point of view, this is often the most important tax benefit. Sometimes thousands of dollars that would have gone to capital-gains taxes remain in the trust, generating income to the income beneficiaries.
- The trust principal is not subject to estate tax. Property that might otherwise be subject to federal estate tax, which can be has high as 45%, is preserved from estate tax entirely.
There are two basic types of charitable remainder trusts. An annuity trust will pay you a fixed dollar amount for the rest of your life. A unitrust will pay you a fixed percentage of the trust principal each year, so if the value of the trust principal increases over time, your income increases with it. By law, your trust must pay you at least five percent of principal annually. You may choose a higher payout rate if you wish, but the higher the payout rate the lower your income-tax deduction on the charitable contribution. Also, selecting the highest rate possible may not work in your best interests for another reason. If the trust principal declines under the strain of meeting the higher rate, your income will decline with it. On the other hand, a lower payout rate may allow the principal to grow, and your income to grow with it. Additions may be made to a unitrust at any time, but you can contribute to an annuity trust only once.
Gifts of appreciated stock are ideal for funding a charitable remainder trust because the stock can be reinvested by the trust for greater income while bypassing capital-gains taxes at the time of the sale. Appreciated real estate also represents an excellent asset for placement in a charitable trust. Mature investment properties are frequently earning only two, three, or four percent of their fair-market value per year. When these properties are sold and the proceeds reinvested by the trust, earnings often increase significantly. Under ordinary circumstances, owners face substantial capital-gains tax when they sell rental properties or commercial real estate. Because it is your charitable trust that would be selling the property, capital-gains taxes would not apply. Thus the entire net proceeds from the sale may be reinvested to produce more income for you.
There are additional ways that the establishment of a charitable trust can benefit your heirs while also supporting the Fine Arts Museums; please contact Pam Earing, Associate Director of Individual Giving, at email@example.com or 415.750. 8940.