Structuring philanthropic goals

By Nancy Schultz | Jun 17, 2009

When the economy is clearly in the doldrums, it’s not unusual for givers to think about scaling back their philanthropic contributions. At such times, it may be worth exploring avenues of giving whereby you can leave some of your wealth to a favorite charitable cause, yet still reap financial rewards and avoid capital gains taxes. There are several ways to do just that.

Essentially, the trusts outlined below combine giving with receiving, because when it comes to philanthropy, one often leads to the other. By properly structuring your charitable giving, you can enjoy the multiple benefits of supporting your cause and avoid capital gains tax on highly appreciated assets; receive an immediate charitable tax deduction; reduce the size of your taxable estate; and retain an income stream for life or for a set term.


A prime example of how to accomplish this is through a charitable remainder annuity trust, or CRAT. This tax-exempt irrevocable trust reduces your taxable income and provides you an income stream while ensuring that your designated charity ultimately benefits.

It works quite simply. Instead of leaving money to your alma mater in your will, for example, you place the funds into a CRAT and derive a fixed annual income for life or a term of years. Whatever funds remain in the trust after that time go to the educational institution you’ve named. In the meantime, you’re entitled to a charitable deduction when you place the property in the trust.

If you’re looking for a useful hedge against inflation, then a charitable remainder unitrust, or CRUT, might be the right fit. The CRAT gives you a fixed annual dollar amount (a mandatory annual distribution), but a CRUT provides you an annual set percentage of the trust’s assets. If the trust’s assets grow in value, next year that percentage will provide you more income – the same percentage of a larger number.

Wealth replacement trusts

The drawback to these plans is that your heirs may feel shortchanged. One way to remedy that situation could be to create a wealth replacement trust, or WRT.

In this scenario, you create an irrevocable trust for your heirs’ benefit – an irrevocable life insurance trust, or ILIT. When you receive your WRT income, you transfer a portion into the ILIT, whose trustee then uses that money to pay life insurance premiums for a policy on your life. The intent is to use life insurance to replace the amount being given to the charity. However, this technique can also be used to increase family wealth. If this possibility interests you, ask about the details, as they are too complicated for this space.

Estate concerns

Do you want to reduce taxes on your estate? You might look into the idea of a charitable lead trust, or CLT. The idea of a CLT is to endow your preferred charity now, while you’re still around to enjoy seeing the money put to good use. You could, for example, provide your favorite charity with an annual income stream for a term of years. At the expiration of the term, the remaining trust assets would then pass to your intended heirs. This technique works somewhat differently from a WRT, so there will be different tax benefits, too.

Alternatively, you could consider setting up a private family foundation. If you prefer to retain control over your charitable assets, desire to involve your family in gift-making decisions and want to time your bequest to maximize tax advantages, consider a private foundation. This is an excellent means by which to honor your family’s name.

Finally, you may want to explore simplifying the process by opting for a donor-advised fund, which can offer better tax benefits.

Philanthropy is a very personal process. But by thinking strategically instead of emotionally, you can create a lasting legacy, while doing it in such a way that your estate benefits as well. If you would like to discuss your charitable goals, please give me a call.
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