THE CHARITABLE REMAINDER
TRUST
It is a versatile giving
technique that you can tailor to your own situation. You designate the trustee (any
qualified institution or individual who will administer it can act as trustee).
You also designate who will receive the income, and for how long. These are
important decisions, and because the trust, once established, is irrevocable,
you should seek the guidance of your personal financial and legal advisors. The
Diocese of
The Charitable Remainder
Trust Explained
You may have an
asset—a sum of cash, appreciated publicly listed securities or real estate—that
you would like to become your gift to the Diocese of Edmonton, but you need the
income it provides. One possibility is to leave it as a bequest after your death.
But there is another option. With a charitable remainder trust, you can make
your gift now—and continue to receive
the income for your lifetime, the joint lives of you and your spouse, or a
specified term of years.
Unlike a future
bequest, which yields no immediate tax benefit, the charitable remainder trust
provides you with a donation receipt in the year of your gift. Also, placing
the property in trust frees you from management responsibility and removes the
property from your estate, guaranteeing your privacy.
Consider an
example:
Sheldon M., age
70, wants to establish an endowed fund with the Diocese of Edmonton in memory
of his deceased wife, but he is reluctant to give up any of his investment income.
He transfers property worth $250,000 to a charitable remainder trust from which
his net income will be approximately $15,000 a year for life. When he funds the
trust, he receives a donation receipt for $120,675, which, assuming a 50 percent
combined tax credit, will translate into tax savings of $60,388. After his
death, the trust principal will be used to create the endowment.
The Tax Benefits
The donation
receipt Mr. M. receives represents the present value of the future gift (the
“charitable remainder”) which the Diocese will receive at his death. It is an
actuarially computed figure based on the amount contributed, the age of the
donor, and an appropriate discount rate (the lower the rate, the larger the
donation receipt). The amount of the donation, which may be claimed in any
year, is limited to 75 percent of the donor’s net income for that year, but the
excess may be carried forward up to five years beyond the year of the gift. If
Mr. M’s income were $100,000, he would need one additional year to achieve
maximum tax savings.
Funding Your Trust With Appreciated
Property
The assets you
use to fund your charitable remainder trust may include publicly traded securities
and real estate. Usually these will have increased in value during your
ownership. When you transfer property that has appreciated in value and you are
the income beneficiary, you will be taxed on 50 percent of the gain
attributable to the charitable remainder.
Suppose that
Sheldon M. funds his trust with $250,000 of publicly traded securities for
which he paid $100,000 some years ago. The total gain on the securities is
$150,000. The computed present value of the charitable remainder is $120,675,
or 48.27% of the entire $250,000 trust. Therefore, he recognizes $72,405 of
gain (48.27% of $150,000), and $36,202 (50% of $72,405) is taxable. Although
the tax on this would be $14,119, he has a tax credit of $60,388 from the
donation receipt. Thus, he offsets the tax on the gain and realizes net tax
savings of $46,219.
No matter how
much taxable gain is attributable to the charitable remainder of your trust,
the tax credit resulting from your donation receipt will always exceed the tax
on the gain, unless you have named someone other than yourself as income
beneficiary. This is true even though the capital gain is taxable, because the
amount of the donation receipt you can claim for credit is 100 percent of the
taxable gain arising from the gift plus 75 percent of your other income.
Giving Your Personal Residence
You love the old
house, but it is simply too big for your present needs. If you move to a smaller
property and donate the house to fund your trust, you will recognize no capital
gain whatever; no matter how much it has appreciated in value. The trustee will
sell the house and invest the proceeds to earn new income for you, and at your
death or the expiration of your trust, the Diocese of Edmonton will receive a
significant and very welcome gift.
If you would like more information, in confidence and without
obligation, please complete the Request
for Planned Giving Information form.