Most Colorado residents consider estate planning a means of providing for loved ones after their death, but it’s also an effective way of continuing to support causes in which you believe. With the assistance of an experienced and knowledgeable Colorado estate planning attorney, it is possible to provide for favorite charities, care for loved ones, and minimize taxes at the same time. One way to do this is by establishing a charitable trust.
Types of Charitable Trusts
Depending on your estate planning goals, there are two primary types of charitable trusts you may wish to consider. The first is a charitable remainder trust. A charitable remainder trust (CRT) is irrevocable, meaning you cannot reclaim the assets in the trust once you have created it. A charitable remainder trust is set up to pay you, and your spouse if you are married, a stream of income for a specified term of years or for life. You and your spouse are considered “income beneficiaries.” At the expiration of this term, the trust is terminated, and the remainder of trust assets are paid to a charity that you have designated. Although a charitable remainder trust is irrevocable, and the assets it contains are no longer a part of your taxable estate, you have the right to change the charitable beneficiary or beneficiaries of the trust at any time during the trust term.
A charitable lead trust is, in some senses, the reverse of a charitable remainder trust, and is sometimes referred to as a “reverse CRT.” With a charitable lead trust, a charitable organization is designated to receive payments during the term of the trust. Upon expiration of this term, the trust terminates and the assets are paid to a beneficiary chosen by you, the trustmaker.
Tax Benefits of Charitable Trusts
Because their assets will ultimately end up in the hands of a charity, CRTs are not subject to paying capital gains taxes. Since capital gains taxes may range from 10% to 20% of an asset’s growth in value, CRTS are an excellent way to convey assets with a low cost basis, but significant appreciation in value. Examples include real estate that has been owned for decades and has increased greatly in value, and stock that was purchased at a low price and is now worth much more than when it was acquired.
The fact that a CRT is considered to be outside of your taxable estate also affords a significant tax savings. You may have tax savings of a third or more of each dollar of value contributed to a CRT. In addition, because a CRT benefits a charity, you are entitled to an income tax deduction of the present value of the charitable remainder interest. If you are not able to use the entire value of the deduction in the year in which you make the contribution, you may be able to carry the deduction forward for up to five years. Charitable lead trusts receive tax advantages similar to those enjoyed by charitable remainder trusts.
In general, the use of charitable trusts benefits you and your chosen charities, and keeps your assets out of the hands of the IRS. However, charitable trusts are not right for everyone and every situation, and it’s important to discuss the implications of their use with a qualified Colorado estate planning attorney.
If you believe a charitable trust may be a good option for you, we can help. For experienced guidance, contact the experienced estate planning and probate attorneys at Davis Schilken. Call us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.