Charitable Remainder Trusts /
Islamic Planned Giving
(How Charitable Remainder Trusts Benefit You)
An often-under-utilized estate planning technique is the charitable remainder trust. However, as this tool is becoming more well known, it is becoming more popular, especially with those who have large estates or those with highly appreciated assets who wants to avoid paying the capital gains tax.
THE CHARITABLE REMAINDER TRUST HAS EIGHT GREAT ADVANTAGES
1. Income tax savings
2. Estate tax savings
3. Capital gains tax avoidance
4. Asset protection
5. Fulfill charitable philanthropy desires
6. Steadying stream of income for present needs
7. Retirement plan
8. Wealth replacement life insurance trust to protect heirs
The government has had a long-standing public policy to strongly support charities. As such, the tax code has given favorable treatment to certain types of charitable giving. The charitable remainder trust is an excellent example of a vehicle with numerous tax advantages to the donors. It is an exciting tool where the donor, charitable organizations and the donor’s heirs all greatly benefit from the use of these special kinds of trusts. Many of these advantages will be explained in this chapter.
WHAT IS A CHARITABLE REMAINDER TRUST?
A charitable remainder trust is formed when a person places certain assets in a special type of trust. The individual can receive income from the trust assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the trust is used to purchase life insurance. The proceeds from the life insurance go to a designated heir or heirs who receive the money without incurring any estate tax liability.
A. Types of Charitable Remainder Trusts
The following are two types of charitable remainder trusts:
1. Charitable Remainder Annuity Trust
2. Charitable Remainder Unitrust
The annuity trust pays a fixed amount each year, while the unitrust pays an amount each year based upon the value of the assets within the trust.
B. History of the Charitable Remainder Trust
In an effort to promote charitable giving, the Congress established these two types of trusts in the Tax Reform Act of 1969. Thus, these trusts are specifically approved and regulated by the Internal Revenue Code and Regulations.
BENEFITS OF CHARITABLE REMAINDER TRUSTS.
1. INCOME TAX SAVINGS
Charitable remainder trusts provide income tax savings. This occurs because the property donated to the trust is tax deductible. The size of the deduction varies according to certain factors, which include the followings:
- Age of donor
Value of the assets donated to the trust
Income distributed to the donor in relation to the value of assets that eventually goes to the charity.
2. ESTATE TAX SAVINGS
If properly structured, the charitable remainder trust can provide tremendous estate tax savings. By donating the property to a charity, the property is no longer considered part of the donor’s taxable estate. The donor, however, can receive income from the trust; part of this income is used to buy life insurance. The life insurance, if put into an irrevocable trust, can go to the donor’s heirs’ tax free.
3. FULFILL CHARITABLE PHILANTHROPY DESIRES
By donating property into a charitable remainder trust, you can fulfill certain desires you may have to further charitable interest, not only do you get to fulfill these charitable desires, but you can do it in such a way as to receive great tax duction benefits.
4. CAPITAL GAINS TAX AVOIDANCE
One of the great advantages of the charitable remainder trust is its ability to avoid capital gains tax upon appreciated property. The donor can place appreciated property into the trust with no capital gains liability. the trust is permitted to sell and reinvest the property with no capital gains tax liability.
5. ASSET PROTECTION
Assets placed into a charitable remainder trust cannot be touched by the donor’s creditors. Of course, to be protected, any donations must comply with the fraudulent conveyance statute. This means it must not be the donor’s intent to defraud creditors.
6. STEADYING STREAM OF INCOME FO RPRESENT NEEDS
As state previously, an individual can donate property into a trust and receive income from the trust assets. The amount of income and the length of its dispersal will depend on the particular charitable remainder trust that is used and how it is structured.
7. RETIREMENT PLAN
Often individuals use the income payments of the charitable remainder trust as part of their retirement plan. Regular income payments from the charitable remainder trust are used like an annuity to benefit the donor during retirement years when his or her regular income normally drops.
8. WEALTH REPLACEMENT LIFE INSURANCE TRSUT TO PROTECT HEIRS
The assets that are placed into a charitable remainder trust are no longer available for the benefit of the donor’s heirs. However, it is common for part of the income from the trust to be used to purchase life insurance on the donor’s life to replace the value of the assets donated to the trust. As explained previously, if properly set up, the insurance proceeds can go to the heirs completely tax free.
If the donor did not set up a charitable remainder trust, but rather gave his or her property outright upon death, the disposition of the property might be subject to very steep federal estate taxes. This is of great concern to those who anticipate paying federal estate taxes upon their death.
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