The Art and Science of Giving: Charitable Gifting and Your Financial Goals

Constructing your financial plan involves not only the appropriate allocation of your assets as you need them now, but also the most efficient and rewarding transfer of those assets. Many of our clients express an interest in charitable giving because it gives them a chance to share their good fortune with others. But charitable giving may also offer some rewarding economic benefits to you and your family.

Charitable trusts are split-interest gifts designed to benefit both a charity and a non-charitable beneficiary. That is, they allow you to provide monetary support to a charity while still maintaining assets and achieving some tax advantages for you and your family. Moreover, many charitable trusts are flexible—you can donate most types of assets to fund them, including cash, securities, or property. There are two main types of charitable trusts, and we will work together to decide which option is best for you.

Charitable lead trusts

A charitable lead trust pays a fixed annual amount to your chosen charity for a pre-designated term of years. Once that period ends, the entire trust principal passes to the non-charitable beneficiary you name—whether that be a family member, a friend, or yourself. A properly structured charitable lead trust offers estate tax advantages, as it can reduce the size of your estate and minimize the tax burden to your non-charitable beneficiary. Furthermore, it may allow you to keep assets in the family with reduced tax consequences.

You can establish a lead trust to take effect either during your life (a living or inter vivos trust) or at your death (a testamentary trust). In the case of the living trust, the owner of the trust can take a charitable income tax deduction for the present value of the total amount of future payments to the charity. Because the owner of the trust will have to pay taxes on the income earned by the trust—and capital gains taxes on anything sold in the trust—this type of trust is typically funded with assets that are income-producing or relatively liquid.

Similarly, the testamentary trust allows you to reduce the estate tax incurred by retaining a cherished property within the family. The IRS will allow the executor of your estate to remove the calculated present value of the future payments to the charity from your estate, but the remainder (the amount predicted to go to your non-charitable beneficiary) is subject to estate tax.

In either situation, the charitable lead trust can mitigate the tax concerns of keeping a rapidly appreciating asset within the family.

Charitable remainder trusts

A charitable remainder trust allows you to benefit your favorite charities while you or another designated beneficiary continues to receive income from the donated property for a specified period of time or for life. The charity will receive the remaining assets when the trust ends. As with the charitable lead trust, you can opt to create a living charitable remainder trust or a testamentary charitable remainder trust.

Besides serving as an important charitable planning tool, a charitable remainder trust is often established to defer capital gains tax on the sale of a highly appreciated asset. Since a charitable remainder trust pays no income taxes, the sales proceeds can be put to work for you in a newly diversified investment portfolio. As a result, you may want to consider donating a highly appreciated asset that produces little current income, so that you can reinvest in an income-producing portfolio without recognizing immediate income taxes.

Nonetheless, a charitable remainder trust is designed to provide your beneficiaries with a stream of income—a desirable feature if they won’t have enough income from other sources.

Are charitable trusts right for you?

Charitable trusts are clearly valuable estate and charitable giving tools. They allow you to retain treasured assets and provide an income stream for you or your beneficiaries. But there are tradeoffs. As with any planning resource, your full financial situation and goals must be considered before making a decision about charitable trusts. A charitable trust is an irrevocable commitment that cannot be changed—even if there are changes in your or your family’s financial or personal circumstances.

Charitable giving is a delicate matter because of the critical balance between personal needs and charitable leanings. As you consider these and other estate planning strategies, we will work with you to determine the best course of action for you and your family.

Securities offered through Commonwealth Financial Network®, Member FINRA/SIPC. Investment advisory services may be offered through Commonwealth, a registered investment adviser, and/or BerryDunn Wealth Management, LLC, a state-licensed investment adviser. Advisory services and fixed insurance products and services offered by BerryDunn Wealth Management, LLC, are separate and unrelated to Commonwealth. 100 Middle Street, Portland, ME 04101 207-541-2200.