Combining Trust Income with a Charitable Tax Receipt
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 Edmonton Planned Giving Officer can assist you along the way.
You may have an asset—a sum of cash, appreciated publicly traded 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 the asset 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 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 managing it, and removes the property from your estate, guaranteeing your privacy.
Consider an example:
Sheldon, age 70, wants to establish an endowed fund with the Diocese of Edmonton in memory of his deceased wife. He is reluctant to give up any of his investment income so 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 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 Sheldon 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 a discount rate (the lower the rate, the larger the donation receipt). The amount of the donation that may be claimed in any year is limited to 75 percent of the donor’s net income for that year and the excess may be carried forward up to five years beyond the year of the gift. If Sheldon’s income was $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 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 realizes $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 realize no capital gain, 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.
The information on this webpage does not constitute legal or financial advice and should not be relied upon as a substitute for professional advice. The Planned Giving Office encourages you to seek professional legal, estate planning and financial advice before deciding on a course of action. The examples given above reflect rates at the time of writing and are subject to change.