The variety and complexity of charitable giving options can be overwhelming. A wealth manager with expertise in charitable giving can help guide you to an intelligent philanthropic approach. So put away the checkbook, and let’s review two charitable giving options: Donor-Advised Funds and Charitable Remainder Trusts.
An increasing number of families and business owners want to support the causes they care about, both while they are alive, and after they pass. For charitable-minded families, several gifting vehicles not only help you better meet your philanthropic goals but can also help you address other important issues – reducing taxes, increasing cash flow, transferring wealth efficiently, and protecting your assets. The optimal charitable strategy for you will depend on your values, goals, and objectives.
A Donor-Advised Fund is a 501c(3) charity organization that receives donations from you, allows you to invest those contributions, and specifies whom you want to grant your gifts. Donor-Advised Fund accounts are easy to use. Most large brokerage firms such as Charles Schwab, Fidelity, and Vanguard have user-friendly client portals, which can come in handy if you donate to several charities.
With a Donor Advised Fund, you receive an immediate tax deduction when you fund the account, and the account can grow tax-free based on the performance of the investments selected. It is typically best to fund the account with appreciated assets you would otherwise pay capital gain taxes on the sale because you eliminate capital gains tax. Tax mitigation is the main reason people chose donor-advised funds as a charitable gifting vehicle.
Some firms that offer donor-advised funds have account size and donation minimums, so you will want to find out what they are before opening your account. Once you fund the account, the invested money remains in the account until you decide which charities make gifts, which could be at any time, even years down the road.
CHARITABLE REMAINDER TRUSTS (CRT)
A Charitable Remainder Trust can generate an income stream for yourself or any person(s) you choose. You can design the income to be for a set period or your lifetime. Once the trust disperses the funds to the named beneficiaries, the trust gifts the remaining assets to charities that you choose. It also provides you an immediate charitable deduction in the year you fund the account.
A Charitable Remainder Trust has several potential benefits. First, it helps fulfill your charitable gifting goals. Second, it helps provide income for your living needs or any person(s) you choose. Third, the trust assets grow tax-deferred. Additionally, you are eligible for an immediate tax deduction to help offset other taxable income. Finally, the assets are removed from your estate, potentially helping to reduce estate taxes.
There are two caveats in a Charitable Remainder Trust you should understand. You have to select the charities when you establish the trust, years before the gift will occur. For this reason, some people will choose their donor-advised fund as the charitable beneficiary of the trust because they can have more control over naming and changing charities that receive the remaining funds. Also, the trust is irrevocable, meaning that you cannot change your mind once the assets are transferred to the trust. You give up ownership of the assets in return for the potential income stream.
THERE ARE TWO DIFFERENT KINDS OF CRTs:
Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT)
A CRAT will pay a fixed dollar amount to the person you designate for a set number of years, with a maximum of twenty years. For example, you can select the amount at $45,000 annually. You cannot change the payout amount once set even if the trust assets grow more than the distribution. You also cannot add future assets to a CRAT once it is established.
A CRUT pays a set percentage of the trust assets each year, instead of a fixed dollar amount in a CRAT. For example, you can choose to pay out 7% of the trust assets annually. The income stream varies each year based on changes in the trust value as it increases or decreases. The annual payment increases or decreases with the value of the assets in the trust.
WHAT ARE THE BEST ASSETS TO GIFT?
Your best option is to gift appreciated assets (stocks, real estate, private business shares, etc.) that will otherwise incur a capital gain tax upon the sale. Once you make the gift with the appreciated assets, you eliminate the capital gain tax liability. The charitable giving vehicle – Donor-advised fund or Charitable Trust – sells the investment in a tax-exempt structure. Compare this strategy to first selling the asset, paying the tax, and then gifting cash. Ideally, you will never make charitable gifts with cash.
Affluent families practice intelligent philanthropy using IRS-approved tools to make more impactful charitable gifts while also improving their financial security. You don’t have to be ultra-rich to benefit from the same strategies. Make sure your advisor is knowledgeable with philanthropic planning or has access to experts in this field.
Charitable Trusts and Donor-advised funds can be wise options to help you meet your philanthropic goals. These charitable giving vehicles can also improve your personal finances significantly with the potential for increased income streams and reduced taxes.
DISCLOSURE & ACKNOWLEDGEMENT:
The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product. Rather, we are seeking to provide you with advisory services. Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment. Past performance is no guarantee of future results.