Use a Charitable Trust for Income or for a Legacy

A chartable trust is a trust that has a charity as one of its beneficiaries. With it you can contribute to your charity and provide for yourself or your other beneficiaries too. And, of course, charitable giving will give you a tax deduction you can use.

You can set up a charitable trust for a fixed term or for someone's lifetime. For just two beneficiaries, where one of which is a charity, the charitable trust distributes income annually to one beneficiary. But at the end of its duration, it distributes the remainder of the trust to the other beneficiary.

If the charity gets the trust's remainder, then it's called a Charitable Remainder Trust (CRT). If the charity gets the income, then you have a Charitable Lead Trust (CLT). But the amount annually distributed and the trust remainder must conform to IRS requirements to maintain charitable tax deductions for the grantor (donor).

Charitable remainder trusts (CRTs) immediately give off income tax charitable deductions to their grantors which can be put to good use. CRTs are generally created during the life of the grantor - typically in the 55 to 80 year old range - by immediately funding the trust. If you typically have a high income, your effective take home income will increase by the large charitable income tax deduction generated by your trust contribution.

The "income tax deduction" you actually receive is based on an Internal Revenue Service (IRS) formula that considers the ages of the donor and other income beneficiaries, the annual payout of the trust, and an IRS index rate known as the Applicable Federal Rate (AFR). The older you are, the larger your income tax deduction will be. If the present value of the remainder interest equals at least 10% of the value of assets transferred into the trust, then the trust may qualify as a charitable remainder trust.

If you use appreciated property to fund your CRT, you can bypass paying the capital gains tax on it since it'll be the trust that sells it -not you. Dodging that capital gains tax enhances your tax deduction since you are donating appreciated property at its appreciated value.

You can use the substantial increase in your take home income that the charitable tax deduction gives you to replenish a legacy to your heirs, especially if your trust donation depleted much of your holdings. You can either gift them your added income or leverage that gift by buying life insurance on you for them with your added income. The life insurance proceeds can benefit those heirs who stand to lose from your charitable trust donation.

Set up an irrevocable life insurance trust (ILIT) to own that life insurance policy so its proceeds will not add to your estate -and thereby increase your eventual estate tax. You can call it a wealth replacement trust for the sake of your heirs.

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