How to use a charitable remainder trust to lower tax obligations and benefit family members

If you have worked hard and had some financial success, you may wish to give back by supporting a charitable organization. You may also wish to avoid the high income and estate taxes in New York by donating instead to a beneficial cause you believe in.

You can accomplish these goals through a charitable remainder trust. Such a trust can help you to support a charitable organization while minimizing tax consequences for yourself and your estate.

In brief, a charitable remainder trust is an irrevocable trust set up for the benefit of a tax exempt charity. The trustee then pays you income from the trust for a specified time, up to and including lifetime payments. After the trust term ends, the charity receives the remainder of the trust.

Tax advantages to a charitable remainder trust

In addition to helping those in need, a charitable remainder trust has significant tax benefits. These include:

  • An income tax deduction for the value of the charitable gift spread out over five years. The IRS will calculate the deduction based on the dollar value of the gift, minus what you will receive through interest payments from the trust
  • A reduction in your taxable estate
  • The ability to gain income from property that is not producing income without garnering income tax

The third bullet point may require some elaboration. Say you own stock and are willing to use it to benefit a charity. If you sell, you must pay a capital gains tax, even if you donate the proceeds to charity after the sale. If, instead, you place the stock in a charitable remainder trust before you sell it, you can donate the full amount tax-free. The trustee is then free to sell the stock free of capital gains tax, while you receive income from the reinvestment of trust assets (which are larger at this point because they are not reduced by any capital gains tax) per the terms of the trust (although this income, of course, is subject to the income tax).

Using a charitable remainder trust and life insurance to help a spouse and heirs

The tax benefits of a charitable trust are well-known. Less known are ways in which a charitable remainder trust can be used in conjunction with a life insurance policy to maximize contributions to both a charitable cause and to family members and heirs.

A charitable remainder trust normally doesn't benefit immediate family members, since after the trust term ends, the remainder goes to charity. However, if you use the income generated from a charitable remainder trust to pay for a life insurance policy, when you pass away the CRT will go to the charitable organization in full and the life insurance policy will pay out to the family.

You also may be able to provide more of an income for a surviving spouse through a CRT. Again, an example may help clarify. Suppose you create a CRT with property worth $1.5 million. Your heirs saved about $315,000.00 by having the trust sell the property and gained a charitable deduction for the remainder passing to their local charitable organizations. However, the grantors of the trust want to replace about $1.0 million of the gifted asset as that represents about what they would have received had they inherited the proceeds from the sale of the property after the capital gains taxes were paid. The grantors buy a life insurance policy with a $1.0 million death benefit held in a separate Life Insurance trust and the proceeds are 100 percent income tax and estate tax free.

Contact an experienced estate planning attorney

This information is not intended to be legal advice. Your needs may differ from the examples above. Please consult with an experienced estate planning attorney to discuss the benefits of a charitable remainder trust and if one is appropriate for you.

Polizzotto & Polizzotto is a New York City law firm which helps clients maximize their estate plan while minimizing tax obligations.