How charitable giving might pay off in the long run

A trust can be a powerful tool to potentially cut taxes while doing good for your family in the long run.

While giving directly to charity offers annual income-tax deductions and the satisfaction of giving back, giving via trusts can boost benefits on both sides, potentially cut taxes for you and, potentially, increase donations to charities.

There are two popular options: charitable remainder trusts (CRTs) and charitable lead annuity trusts (CLATs). The one that’s right for you depends on your circumstances and goals. Aconversation with your Financial Advisor can clarify matters.

The CRT: Tax-advantaged giving

With a CRT, you put assets in the trust, and then receive yearly income from those assets over the life of the trust (which can last for your lifetime, your and your spouse’s joint lifetimes, or for a fixed number of years, depending on how it’s established). Whatever assets are left go to the charity. “If you have an appreciated asset that you want to sell and you want to make a gift to charity, a CRT can be a great plan,” says Erin Wilms, head of advanced planning for UBS Financial Services Inc.

One income-tax break you get with a CRT is distributing the capital gains from the sale of an appreciated asset over a number of years. Instead of selling the asset and paying an immediate capital gains tax, you’ll pay tax – most likely a combination of ordinary income tax and long-term capital gains tax – only on the income stream you receive from the trust each year.

“You often want to defer taxes if you can, which puts more of your money to work for you,” says Wilms. You also get an immediate incometax deduction for the amount that will eventually pass to charity. The size of that deduction depends on the rate of return the IRS assumes your assets will earn in the trust, which is about 2 percent today (that rate fluctuates monthly and is based on prevailing interest rates).

The higher the rate when you fund the CRT, the larger the income-tax deduction.

CLATs: Transferring wealth

A charitable lead annuity trust (CLAT) lets you provide for charity immediately and for your family in the long term – possibly without gifttax consequences.

The assets in a CLAT first get distributed to charity through fixed annual payments for a set number of years. At the end of the CLAT term, the remaining assets are distributed to your beneficiaries – typically your children. A CLAT often is zeroedout, meaning that the present value of the payments to charity is equal to the assets you gift to the trust.

CLATs work especially well when interest rates are low (as they are now) and assets are undervalued. You can fund a CLAT with assets that are likely to appreciate at a much higher rate than the IRS assumes today.

“If you put $1 million in a CLAT today, the government says that asset will earn a whopping 2 percent a year for the next 20 years,” says Turney Berry, a partner with Wyatt Tarrant & Combs in Louisville, Kentucky, and chair of the estate and gift tax committee of the American College of Trust and Estate Counsel. “But if the assets grow at 5 percent a year instead, the charity receives $62,000 a year in an annuity, and the trust is left with $600,000 that will pass to your kids free of any gift tax.”

You might consider a CLAT if you’re already making annual donations to charity, says Wilms: “Instead of you writing yearly checks to charity, the trust makes the gifts, and you get the collateral benefit of transferring tax-free wealth to your children.” Speak with your Financial Advisor about what your particular charitable goals are, and how they can work within your larger wealth management plan.

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice.

Neither UBS Financial Services nor its employees (including its Financial Advisors) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.