Many people would like to donate significant assets to charity, but they plan to do it upon death and retain the related income or use of the property during their lifetimes. At the same time, they'd like to see good works done by those funds while they're alive.

For such individuals, a charitable remainder trust could provide an opportunity to make a significant donation during their lifetimes and get a current donation credit, while allowing them to retain the use and enjoyment of their property.

What Remains?

A charitable remainder trust is an irrevocable trust that holds property for the ultimate benefit of a charity. Typically the donor or settlor transfers property to the trust and, under its terms, becomes the income beneficiary for his or her lifetime.

Meanwhile, the registered charity has a remainder, or future residual interest, which won't be distributed until after the donor dies. It's the residual interest, not the property transferred to the trust, that can be treated as a charitable gift in the year property is transferred.

Assets transferable to the trust include cash, stocks, bonds, real estate or other personal assets. The transfer is generally a fair market value disposition for tax purposes, so the donor may realize a capital gain, however the donation credit's value should more than offset any potential tax liability. If the assets in question are marketable securities, be aware that the special tax treatment relating to the donation of securities will not apply because the donated property is a trust interest and not the securities themselves.

Several factors must be considered when determining the value of the residual interest and the amount of the gift for purposes of the donation credit. These include the market value of the property transferred to the trust, the life expectancy of the life tenant, current interest rates and future economic conditions.
In most cases, the older the donor, the higher the value of the residual interest and the gift. Income earned in the trust is taxable and will generally be taxed in the recipient donor's hands.

Who Benefits?

The major benefit of the strategy is the current donation credit. When a will leaves a substantial portion of an estate to a charity, the donor may not be able to fully utilize the maximum donation credit since it's limited to net income in the year of death (as well as the immediately preceding year). Transferring a portion of assets to a charitable remainder trust will lower the absolute value of the gift, but it lets the donor benefit from tax savings during his lifetime. Unused donation credits can be carried forward for up to five years and ultimately increase the value of the estate.

Assets transferred to a charitable remainder trust during a person's lifetime also don't form part of his or her estate and therefore won't be subject to probate fees. Finally, because the donation is not considered a testamentary gift, the property is not accessible to individuals who might challenge the will.

Of course, along with the benefits, there are risks. A charitable remainder trust is irrevocable, so the property cannot revert to the owner. The donor must be comfortable with giving up the capital today and there is no option to encroach on the capital in the event of a financial emergency.

For donors who are uncertain about their financial futures, this can be a difficult commitment, so save this strategy for the ultra-solvent. In addition, donors should be warned there will be professional fees associated with the establishment of the trust and annual fees for its administration.

Yours truly,

Tactical Asset Management, Inc.
phone: (306) 757-2121
fax: (306) 347-3655
e-mail: inquiry@tacticalassetmgmt.com
website: www.tacticalassetmgmt.com