As the holiday season approaches, many people are filled with a spirit of gratitude and generosity. One might think the onset of a global pandemic last year would have caused many to reduce their charitable giving, but instead, the opposite happened. Americans donated a record $471 billion dollars to charity in 2020, according to a recent report from Giving USA.

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Many philanthropic individuals may wish to increase their response to a worthy cause but are unsure of how a large gift might impact their families’ wealth management plan long-term. Although we may want to change the world, we must be able to support ourselves in order to support others.

Thoughtful planning can reveal how a gift may affect your family’s financial future. In fact, if you have appreciated assets, thoughtful planning and leveraging charitable giving can result in important tax advantages. One of the approaches trust officers, such as those at Arvest Wealth Management, can help people employ is the charitable remainder trust.

Charitable Remainder Trusts

The advantage to this philanthropic strategy is both charitable and private financial goals may be satisfied, unlike when making a simple outright gift to charity. With a charitable remainder trust, you may continue to receive income from the trust for life, or for a set period of no more than 20 years. You can also make another family member the income beneficiary, or you may have more than one income beneficiary.

After the income payments are complete, the designated charity receives the trust assets.

For example, you fund a charitable remainder trust with a million dollars and receive an annuity payment of 50 thousand dollars every year for 20 years. The trust returns an average of 5% each year—sufficient to fund the income payments. At the end of the trust term, you (or the beneficiary) have been paid a million dollars by the trust. However, a million dollars in capital remains, which flows to the charity.

There are two ways to measure the trust income—either as an annually determined percentage of the value of the trust assets or as a fixed dollar amount (an annuity). Thus, the names—Charitable Remainder Unitrust (CRUT) or Charitable Remainder Annuity Trust (CRAT).

Charitable Remainder Unitrust vs. Charitable Remainder Annuity Trust.

The unitrust pays the income beneficiary a fixed percentage of its assets, which are determined each year. If the trust grows in value by more than enough to fund the income, the future income payments increase. This can help protect the income against inflation. However, it runs the risk of reduced income payments in times of economic difficulty. The annuity trust, in contrast, pays a fixed dollar amount regardless of the trust’s investment performance.

Charitable remainder annuity trusts provide greater certainty than unitrusts. The donor knows exactly how much the trust will pay each year, whereas unitrust payments may fluctuate with market conditions. If the trust keeps pace with a growing market in the long run, this creates a growing income flow which helps the donor keep up with the rising cost of living.

Tax Advantages of Charitable Remainder Trusts

Because Charitable Remainder Trusts are tax-exempt irrevocable trusts, you relinquish the right to change your mind once you set up your trust. However, the trust also qualifies you for immediate income tax benefits.

The tax benefit for you? —An immediate charitable deduction. A portion of the value of your deferred gift can be deducted against your adjusted gross income (AGI). It appears as if you made an immediate donation even though the charity won’t receive it until the end of the term. Deductions—as opposed to tax credits—have the greatest benefit when you are in the highest tax bracket. As a result, it might be best to align a large gift with an anticipated high-income year.

Generally, the deductible value of a charitable remainder interest ranges from 20% to 50% of the value of the assets that are placed in trust. The exact amount is determined by actuarial tables, the nature and duration of the income interest, and prevailing interest rates when the trust is funded.

The tax benefit for the charity? —Freedom from capital gains tax. Charitable remainder trusts are often funded by assets, such as securities or real estate, which have grown substantially in value over the years. By donating appreciated property, you may avoid capital gains tax, which you would have paid had you sold and reinvested the proceeds yourself. With substantial capital appreciation, this may result in a sizable difference in total dollars for the charity.

Isn’t all giving planned in some sense?

Planning is always part of the process, but choosing which charity can be difficult and knowing how much to give is not obvious either.

Also, we may wish to see the benefit from our gifts immediately, or we may choose to set up multiple smaller trusts—especially if it’s a small local charity we’re contributing to. If the wish is for an inheritance to be preserved rather than to receive an income, an alternative to consider could be a Charitable Lead Annuity Trust (CLAT). This type of trust works in reverse. It provides annuity payments to the charity as soon as the trust is formed and the remainder flows to the private beneficiary.

With either approach, the idea is to employ “planned giving”—to link your philanthropic intentions with steps, which reduce the likelihood of conflict and create greater financial security for you and your family.

Arvest Trust professionals help clients create trusts, which fulfill all kinds of wonderful goals, from ensuring continued management of wealth in case of incapacity and a smooth transfer of wealth to ensuring the care of a special needs child. However, it is especially gratifying to help clients with philanthropic efforts. If you are considering a substantial gift this year, contact an experienced Arvest Trust Officer so we can help you accomplish your good works.

Arvest Wealth Management does not offer tax or legal advice – consult a professional. This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.

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