Money Matters

Money Matters: Double Your Impact With These Charitable Giving Strategies

Editor’s Note: Briant Sikorski from Stratos Wealth Partners in Cary contributed this article.

Cary, NC – Americans are a generous people. Many support charitable organizations that enhance their communities and enrich their personal lives. In addition to giving wisely to nonprofit groups, it’s important to anticipate financial obligations to family members while you’re still of sound mind.

A charitable lead trust (CLT) may be the ideal tool to help some philanthropically-minded people distribute assets in a fair and cost-effective manner. A CLT offers a two-pronged approach to wealth management: one that serves the financial needs of family members and a second that serves the funding needs of charitable endeavors that you value, whether they involve education, art, religion, medicine or another worthy cause.

A properly structured CLT offers a grantor – the person who establishes the trust – an opportunity to contribute to one or more nonprofit organizations for a set period of years, after which the asset balance of the trust is transferred to either the grantor or another entity, typically a close relative. In addition to leaving loved ones a financial legacy that may extend years beyond the grantor’s passing, a CLT can help reduce estate taxes for heirs.

Basic Structure

The opposite of a charitable remainder trust, a CLT directs an income stream to a designated charity during a clearly stated term, whether a specific number of years (there is no limit) or for the rest of the grantor’s life. At the end of the term, the remainder of the principal goes to either the donor or heirs. The annual charitable payout may reflect either a fixed-dollar amount or a fixed percentage of the trust’s current value, which is revised each fiscal year.

CLTs are often the tool of choice for individuals with assets that have a high potential for future appreciation. They may also be well suited for those with heirs who are minors or otherwise not ready to assume full control of significant assets. By creating and funding a CLT, a grantor can make final arrangements for the disposition of an estate, but defer the date at which beneficiaries actually receive and control the property. In the meantime, the charity of choice receives immediate and ongoing benefits. When the assets do eventually pass to the non-charitable beneficiaries, they are not subject to the federal estate tax.

Keep in mind, however, that the grantor is not able to claim an income tax deduction for contributing to a CLT. In addition, the grantor may have to pay a federal gift tax on a portion of each contribution, albeit only on the value of the remainder interest earmarked for non-charitable beneficiaries. Also remember that while a CLT allows assets to pass to heirs with no federal estate taxes, a CLT is not a tax-free entity. Any income the trust generates in excess of the amount paid to charity is still taxable. And the sale of appreciated assets held within the trust may trigger capital gains taxes.

In Practice

How might a CLT work for you? Consider this hypothetical example: A 75-year-old former businessman has spent a good portion of his retirement years teaching his grandchildren how to paint. His love of art and need for a meaningful income tax deduction encouraged him to create a charitable lead trust of $1 million. Of that amount, $50,000 is directed to a local art museum each year for the rest of his life. Upon his death, the remainder of the trust assets will be divided equally among his three children.

The laws governing trusts are extremely complex and individuals should not enter into any such arrangements without first consulting with a qualified professional experienced in trust management. If you are interested in learning more about using a CLT to enhance your estate-planning agenda, contact your tax and/or legal advisors.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual’s situation is different. You should contact your tax and/or legal professional to discuss your personal situation.

Briant Sikorski is a Wealth Advisor at Stratos Wealth Partners. Photos by 401(K) 2012 and Steven Depolo.