Could a Charitable Remainder Trust Meet Your Philanthropic and Retirement Income Goals?

Could a Charitable Remainder Trust Meet Your Philanthropic and Retirement Income Goals?

| November 03, 2021
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Former president and CEO of the United Nations Foundation, Kathy Calvin said, “Giving is not just about making a donation. It is about making a difference.” Many of us want to give back (especially now given how difficult the last couple years have been for so many), and the desire to give generously is a noble one. 

But it’s important to find the correct balance between taking care of yourself and your desire to help make the world a better place. You want to give a portion of the wealth you’ve accumulated, but you must be discerning to ensure you won’t outlive your money and end up needing charity yourself. One solution to this dilemma is a charitable remainder trust (CRT).

Let’s go over the basics of charitable remainder trusts and how having a strategy for your charitable giving can bring you rewards as well.

Benefits of a Charitable Remainder Trust

A charitable remainder trust allows you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You may receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself, and you may gain creditor protection for it. It also provides other important tax benefits and, best of all, you get to contribute to charitable causes that are important to you and your family. 

How Charitable Remainder Trusts Work

How can a simple trust do all of those great things? This is how: The first step is to set up an irrevocable trust where you are the income beneficiary, and when you pass away, the amount remaining in the trust goes to the charity or charities of your choice. 

Next, you transfer assets to the trust. Ideal assets for this arrangement are those that have greatly appreciated in value since you purchased them. The best are publicly traded securities, real estate, and stock in some closely held companies. S corporation stock and mortgaged real estate do not qualify. Because the remainder beneficiary of the trust is a charity and the trust is irrevocable, you get an immediate charitable deduction for the asset contributed (minus the actuarial value of the income stream retained) on your income tax return. The charitable deduction is limited to 30% of adjusted gross income for appreciated assets, but any excess would be carried forward for five years (or until used up) under current law.

Once you have transferred the asset, the trustee sells it. The trust does not have to pay any capital gains tax and can reinvest the proceeds in a diversified portfolio. For the rest of your life, the trust distributes at least 5% of the value of the trust to you annually, and your charity gets the rest when you pass away (or after a certain number of years, depending on the terms of the trust created).

Why Charitable Remainder Trusts Are Used

Why do you need a trust to do this? Why can’t you simply sell the asset yourself, keep the income, and pass the proceeds to a charity in your will? You can, but after paying capital gains tax, there will be much less to invest and produce income. Utilizing a charitable remainder trust provides important income tax benefits which can save you money, especially if you have a tax year with unusually high income. Also, if you hold the investment, it could be subject to creditors’ claims; if it is held in trust, creditors generally cannot access the assets of the trust.  Lastly a CRT is a great tool for diversifying a concentrated, low cost basis asset to reduce overall portfolio risk.

How We Can Help

This is just a brief overview of charitable remainder trusts, but keep in mind they can be tailored to specific situations. You can choose to receive a fixed income or an annual payout that changes, based on the trust’s investment performance. You can choose the beneficiaries of the trust, whether it is yourself, your spouse, or children. You can also put off collecting the income if it’s not needed right away. Although it might be best to wait until 2022 to set up the charitable remainder trust given proposed tax law changes, it’s never too early to start planning.

If you enjoy making a difference by giving generously to the causes you care about, consider adding a charitable remainder trust to your financial and estate plan. If you want to use this gifting strategy to help you meet specific financial goals, you don’t have to be an expert at financial planning; you just have to know who to ask. Our HBA Wealth team is here to help. Let’s work together to align your finances with your vision and values. 

Get unbiased answers from a team you can trust. To get started, contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

About Haydel, Biel & Associates

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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