Shifting Focus From Estate Tax to Income Tax Planning

Good news for the world of philanthropy: charitable giving is not dead. With the recent changes to the tax code, it’s an appropriate time for estate planning professionals to revisit charitable giving with a view toward identifying these new opportunities and assessing how a charitable giving plan works within the broader estate planning strategy.

With a federal tax exemption today of over $11 million for married couples, it’s clear the attention has shifted from transfer tax planning to income tax relief, asset protection, business succession and other family legacy matters. Given these shifting priorities, it’s no surprise that charitable giving’s role is shifting as well.

Nonetheless, there are a variety of tax-advantaged vehicles available to individuals, allowing them to make a real contribution to the social good. High-income earners – especially clients who own highly-appreciated assets – should consider a specific type of trust especially suited to those with a passion for philanthropy: the Charitable Remainder Trust.

A Charitable Remainder Trust (CRT) is a special form of irrevocable trust that provides benefits to multiple parties: the donor, the individuals receiving distributions from the CRT, and the qualified charity. Typically, the donor/grantor donates highly appreciated assets to the CRT. In return, the donor and/or the donor’s spouse receive a predetermined stream of payments back from the trust over either or both of their lifetimes or a set period of years. It’s possible to structure these “noncharitable” distributions to benefit other beneficiaries, including the donor’s kids, but there may be associated gift-tax consequences, and the trust must meet strict IRS rules for viability. At the end of the noncharitable term, the remainder of the trust is distributed to the charity or charities selected by the grantor.

The donor receives an immediate income tax charitable deduction for the remainder interest transferred to the charity, and the highly-appreciated assets in the CRT are sold free of capital gains tax (because the CRT is tax-exempt). The qualifying charity may be changed over time, and may even be a private charitable foundation established by the grantor, allowing future generations to guide the family’s philanthropic activity.

A Charitable Remainder Trust is certainly one way of reducing clients’ tax burdens while making most of a highly appreciated asset.