The most common form of charitable trust is known as a charitable remainder trust. Such a trust is simple to set up. You transfer property you want to pass to the charity into the trust. Keep in mind that the charity must have tax-exempt status approved by the IRS under the U.S. Internal Revenue Code.
Then, moving forward, the charity serves as the trustee and manages or invests the property so that it produces income. Over time, the charity pays you (or a named beneficiary) a chunk of the income generated by the trust property—either for a certain number of years or for the rest of your life. Upon your death or the end of this period, all property in the trust is transferred to the charity.
Although these trusts represent a generous way to give to charities, they also provide you with a number of tax advantages. These include the following:
- Estate tax breaks: Once the trust is transferred to your charity of choice, it is no longer a part of your estate. This means that none of its assets are subject to federal estate tax. While not all estates are subject to estate tax anyway, people who are above the exemption limit could minimize or eliminate their estate tax responsibility with the use of a charitable remainder trust.
- Income tax breaks: You are able to take a deduction from your income taxes over the course of five years for the amount of money you are donating to the charity. It can be challenging to determine exactly how much money you are able to deduct, as the value of your gift is not just the value you are donating (remember: you are able to generate income from the investments). But the break is certainly beneficial.
- Capital gains tax: Through a charitable trust, you are able to convert appreciated money into cash without having to pay any type of capital gains tax on that money. Charities themselves do not have to pay capital gains tax, so if the charity decides to sell your property, those proceeds will stay in the tax and are not subject to taxes.
There are plenty of other advantages to charitable remainder trusts beyond simply the tax benefits. For example, the income you receive from the trust could end up being quite substantial, depending on the amount of money you put into the trust. This income could be used for a wide variety of purposes, including going right back to the charity, if desired. You do not have to be the beneficiary of this income.
To learn more about establishing a charitable remainder trust and the various benefits associated with this important estate planning tool, meet with a skilled tax planning attorney in the U.S. Virgin Islands.
Tom Bolt is Managing Attorney of BoltNagi PC, is a respected and established estate and tax planning law firm serving individuals, families and organizations throughout the U.S. Virgin Islands.