By: Barry E. Haimo, Esq.
January 17, 2019
What You Should Know about Charitable Trusts and the New Tax Law
As another year winded down and we balanced spending time with loved ones and sending off final charitable donations, some are already gearing up for the new tax season. As you make this transition, keep in mind that while traditionally there has been little crossover between your business and family affairs, we believe the new tax law may very well change that.
In December 17, President Trump signed into law the most sweeping rewrite of tax code in three decades-plus. Nearly two dozen changes associated with The Tax Cuts and Jobs Act went into effect January 1, 2018. Most notably, the standard deduction nearly doubled. Additionally, caps were placed on various deductions, while others were eliminated altogether.
The resulting combination of significant increases in standard deductions and decreases in itemized deductions creates a situation in which it simply doesn’t make sense to itemize, which could make donating virtually impossible for many taxpayers. The Tax Policy Center has already estimated more than 20 million fewer households will claim itemized deductions for charitable giving in the coming tax year.
However, there are a few strategies that may allow you to a) continue supporting the causes you care about most and b) actually involve your family in your philanthropy more, while c) still ultimately reducing your tax bill.
Open a Charitable Trust
Opening a charitable trust can be an incredibly valuable and versatile strategy in accomplishing several of your estate and business planning objectives at once. If you haven’t already considered it, the new tax law makes this a great year to start.
What is a charitable trust? It’s a set of assets – usually liquid – that, for a specified period of time, a donor signs over or uses to create a charitable foundation in which they are held and managed by a charitable organization. During that period, either some or all of the interest produced from those assets is donated to the managing charity.
There are two basic types of charitable trust to consider – remainder trusts and lead trusts.
Under a remainder trust, once the agreed-upon period of time is over – anywhere from a few years to well beyond the donor’s death – the assets and all interest and/or profits generated from them become the property of the charity.
In many ways, lead and remainder trusts are exactly the same. Except when this type of trust expires, rather than passing control of the assets on to the charitable organization, the donor (or in the event of the donor’s death, the estate or other named beneficiaries) will recover control of them.
Imagine that a donor has offered up a set of highly appreciated stocks to a cause near and dear to their heart. Those stocks are especially vulnerable to enormous capital gains and estate taxes.
However, under charitable trusts, donors replace a hefty tax bill with an immediate federal income tax deduction based on the trust’s value. Plus, in the Lead Trust scenario, once the trust expires, taxes will still be owed on the assets, but as estate and gift taxes, which are substantially reduced.
Overall, the charitable trust is a win-win for everyone. Charities receive much-needed funding, and donors are able to access otherwise unavailable tax breaks. In some cases, a charitable trust will be able to generate extra income – tax free – so that you can continue building your own estate as well. You can talk with an experienced will and trust attorney about those and other opportunities available through a charitable trust option.
In the meantime, if you’re inching toward the itemization line, we’ll share one other strategy that may be just the thing to tip the scales.
Consider Donor-Advised Funds
When evaluating your options, consider a donor-advised fund. By incorporating this strategy into your plan, you would contribute more than a single year’s earmarked donation into a single pool of charitable funds and donate over time.
You receive the itemization tax break and the charity receives funding incrementally. Since charities typically allocate funds fiscally, keeping very little in reserves, this scenario helps them plan further ahead, leading to greater impact upon the organization than a single lump sum.
This option can also involve generations of your family in philanthropy by appointing your children as advisers, for instance, or as successors to the fund. There’s an opportunity to teach them about the importance of giving and allow them to provide input on allocations. You’re also teaching them about estate planning and wealth management early on in an engaging way.
Whatever you do this coming tax season, we strongly advise you retain the services of an attorney that focuses exclusively on wills and trusts, given the intricacies of tax law. Do-it-yourself products and services won’t do you the same justice – this is your family estate, and quite possibly the beginning of a legacy.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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