If you would like your money to continue to help others after you pass, it's time to start thinking about your estate's philanthropic capacity - and planning for its future.
Many of our clients proactively plan for the future by setting up a charitable remainder trust (CRT). Charitable trusts allow you to make substantial gifts to a favorite charitable organization without giving up all rights over the property. Charitable trusts are an exception to the general rule that you can't claim a current tax deduction by making a limited or postponed gift. Through a charitable trust, you can make an irrevocable future gift to a charity and still claim a current income tax deduction.
"Making the decision to establish a CRT should not be taken lightly, due to the initial legal fees and required annual accounting fees, but there are plenty of benefits for the right person," Principal and CPA Colleen Meenk says. "I've seen clients with modest means as well as extremely wealthy clients benefit from establishing a CRT. Almost always, there is stock or another type of investment property involved in the trust."
Who is a good candidate for a CRT?
Consider establishing a CRT if you're charitably minded and have an asset that has appreciated significantly that would result in burdensome taxes if sold. For example, let's say you hold stock in a company and the value of the stock goes through the roof. If you sell that stock, there would be considerable savings if contributed to a CRT first. A CRT would sell the stock and you would be taxed only on the income stream received.
If you're considering a CRT, think about your own life expectancy and your assets. Will they continue to grow? You'll be able to use the cash a CRT provides while you're living, but whatever amount remains in the trust after your death will go to charity.
"We caution our clients that a charitable trust does not work for everybody," Meenk says. "To be successful, this has to be the right person with an identifiable asset of significant value."
Why a CRT instead of a standard philanthropic donation?
A CRT allows you to retain the right to an income stream. You won't pay capital gain taxes as you would if you took the earnings from the major asset's sale; rather, you'll be taxed a smaller percentage over the years, avoiding the immediate tax hit. The structure of a CRT also benefits the organization you want to support: It can lead to a larger donation, which will allow you to do more long-term, meaningful good.
How do you set up a CRT?
Review the asset with your accountant as part of your estate and charitable giving plan.
Your accountant will model and calculate your CRT based on your asset's long-term and current market value; this financial modeling will help you better understand the financial implications of a CRT.
Your attorney will draft the trust agreement.
Your asset must be funded, and then sold, by the end of the calendar year.
Interested in donating to your university or a small non-profit?
Most colleges or universities have a dedicated endowment staff that are well versed in CRT calculations and can help with advance planning. Of course, don't forget to run those projections by your accountant and financial advisor!
Smaller, local charities are typically less equipped to plan and implement a CRT. It's best to get a professional opinion early on in this situation.
How is the CRT filed with the IRS?
The CRT is filed on its own return each year, referred to as a Split Interest Trust, with its own K1 reporting the income stream distributed, which is then included in your individual return.
To learn more about the CRT guidelines, check out the IRS website. It would be our pleasure to help you set up your CRT. We're happy to explain the pros, cons, and long-term commitment. Please give Colleen or your CPA a call or email.
Although you'd expect to see an accounting technician tucked away in a cubicle crunching numbers, that's not the case with Amanda. More often than not, she's offsite at the offices of her clients, helping them find easier, more efficient ways to keep track of the cash flow and giving them a better understanding of what the numbers represent. She joined Grimbleby Coleman in 2014 after serving as office manager and accounts receivable/payable with other organizations, bringing with her expertise in payroll, 1099s, QuickBooks, bookkeeping, financial statements, and more.
When not helping clients, Amanda enjoys spending time with her son. He's a huge motocross fan, and they both enjoy watching his favorite rider, Ryan Villopoto, race on weekends during the summer. They also love going to Monterey and Pacific Grove to visit family.
A little fun fact about Amanda, she studied ballet for nine years starting at the age of five (talk about dedication!). Although she no longer dances, Amanda is still a huge appreciator of the art, so don't be surprised if you bump into her at a Central West Ballet or San Francisco show during the Fall and Winter months.