With all the talk surrounding the recent tax changes, especially pass-through income and new rate levels, much of the focus has been about what we pay. Not how we can manage our money more effectively. Here’s what I learned recently; when it comes to taxable gains, the law provides for it to be voluntary. Meaning, you have other alternatives to paying capital gains tax. When I first heard this I said, “No … No Way.”
Here are the details. Since 1969 you can contribute assets to a charitable trust and when they monetize, the gains are sheltered from normal taxes. In fact, the assets can produce income for you and certain tax deductions can apply to it and other income you might have.
Charitable trusts may be set up during a donor’s life or as a part of a trust or will at death. There are two basic types of charitable trusts in the U.S. The first is a lead trust, where the charity is paid first, and the remainder, after the trust termination, goes to beneficiaries (such as heirs or back to the donor). The second is a “remainder” trust, wherein the charity is paid last after termination of the trust, after other beneficiaries have received payments. Payments may be a fixed amount, annuity trust, or a percentage of the principal. Many people use charitable trusts to leave all or a portion of their estate to charity when they die, both for philanthropic purposes and for certain tax benefits.
Let’s say you have an income producing, fully paid asset. Or you are selling the assets of your company or you have mandatory IRA distributions that must be taken. Each of these could be placed in a charitable trust and benefit you by avoiding the immediate taxes due, while at the same time benefiting the social cause of your choice.
My wife and I are planning to contribute over $3M in this way for a live-in care facility for recovering women who were sexually trafficked. A cause we started fund raising for this past year. We are also encouraging others to help and we have set a goal of over $50M to establish a facility capable of helping 600 girls over the next 10 years.
Some charitable trusts are structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates. For us it was a very simple decision. I wanted my wife to live comfortably for many years and we wanted to make a marked difference in the world.