How Charitable Giving Can Increase Your
Family's Wealth

The tax laws offer valuable opportunities to those who care to seek them out. For example, here's how you might use a charitable gift to increase the amount of wealth you can transfer to your heirs.

Taking advantage of this opportunity involves three steps: creating a charitable trust to generate a substantial income tax benefit, buying life insurance with the tax savings, and letting the proceeds replace the donated assets that otherwise would have passed to your heirs. The result can be a substantial increase in the amount you will be able to leave to your children or other heirs free of estate taxes, as well as the gratifying feeling that you have supported a cause you favor.

Gaining a Tax Advantage

A charitable trust can separate the timing of your philanthropic gift from its financial benefits to you. With a charitable remainder trust, you arrange to make a future donation—of cash, appreciated securities, or other assets —to a tax-qualified charitable organization of your choice. You place the gift assets in the hands of a trustee for a term you choose. This can be up to 20 years, or for your lifetime, or the lifetime of you and a beneficiary. When the term ends, the trustee pays the trust's principal to the charitable organization. But, during the term, you receive income from the trust.

The trust arrangement generates a substantial, immediate income tax deduction in the amount of your future gift's present value—a percentage of the trust assets' total value. This present value, calculated using IRS tables, is the current fair market value less the actuarial present value of all the income payments expected to be made from the trust. The shorter the term you choose or the lower the payments you receive, the higher the deduction for your gift becomes. The illustration below provides an example of how much the income and deduction might be.

The Tax Value of a Ten-year Charitable Trust
Fair market value of trust's assets (The principal of a charitable remainder annuity trust. The charity receives the principal at the end of the trust's term.) $750,000
Annual payments to trust's maker $52,500
Present value of ten years of payments $358,722
Charitable deduction/charitable remainder $391,278
Deductible portion of trust's value 52

This example assumes a 7% annuity rate, one $52,500 payment annually at year-end, 7.60% table interest rate factor. The deduction would change somewhat with earlier and more frequent payments and differences in the interest rate factor.

Replacing the Gifted Assets

You use the tax savings derived from creating the trust to obtain life insurance. As your situation requires, the policy's death benefit may be payable after your death or after the deaths of both you and your spouse (a second-to-die policy). The death benefit is not subject to estate taxes if a properly structured life insurance trust is used. Insurance benefits are free of income taxes to the receiving beneficiaries. Therefore, the policy will provide your children or other heirs with tax-free assets that replace, or more than replace, the funds you have donated.

Professional Help

The professionals at The Commerce Trust Company can evaluate whether this type of trust would be a good strategy in your circumstances and determine the best combination of term, payments, and policy. If you want to learn more about how a charitable trust can increase the wealth that passes to your children, please call us.

Disclosures:

  • Consult a tax advisor for advice.
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