BY: Mollie J. Seymour
Market President, Birmingham, Argent Trust Company
Women traditionally fill the role of nurturer in their families, and for some, that feeling of responsibility also extends to their communities through charitable giving.
According to a 2017 study by the University of Zurich, women are more likely than men to engage in prosocial behavior (voluntary behavior that benefits others), including simple acts of kindness and charitable giving. On top of that, a study spearheaded by PayPal suggests that despite earning 19 percent less than men, women give more money to charity, and even grow in their generosity as they get older.
When creating an estate plan, I know it can be a challenge to balance the desire to provide for loved ones with helping charitable causes that strike close to the heart. For my clients who find themselves in this position, I generally recommend two options that can be very useful in accomplishing those dual goals, while also providing some additional tax benefits.
Charitable giving through a charitable lead trust
I’ve written previously about charitable lead trusts, which are irrevocable trusts that can be structured to distribute assets to charities of the grantor’s choice for a fixed period of time. After that, the remaining assets go back to the grantor or any named beneficiaries, such as a spouse, children, or other family members.
One big reason that charitable lead trusts are so popular is their tax benefits. Those benefits vary depending on what kind of charitable lead trust a donor chooses to set up. With a grantor charitable lead trust, the grantor can take an income tax deduction based on the current value of the total amount they’ll be giving to charity through the trust. With a non-grantor charitable lead trust, the trust itself is considered the owner, not the grantor, which doesn’t make this income tax benefit possible. However, under this arrangement, a lower remainder value of the trust will be subject to gift and estate tax, which allows the remainder beneficiaries to receive more assets at the end of the term of the trust and potentially more beneficial for wealth transfer.
Although the donor does lose direct control of the funds when they go into the trust, they can still have input on what charities their money benefits by using a donor-advised fund. A donor-advised fund can be set up as the charitable beneficiary of the charitable lead trust, with the donor choosing where the money goes, and how the total amount allocated each year should be divided.
The benefits of charitable remainder trusts
Another option worth exploring for charitably minded individuals is a charitable remainder trust, which essentially functions in reverse order to a charitable lead trust. Instead of a charitable organization receiving the assets initially, the gift occurs after the trust has provided an annual income stream to the donor or beneficiaries for a set number of years, or the life or lives of the donor/s.
A charitable remainder trust might be most appropriate for charitably inclined individuals who have an asset that has appreciated in value and makes up a large percentage of their wealth. By putting that asset in a charitable remainder trust and selling it, the donor can avoid capital gains taxes associated with the sale, can achieve diversification of the portfolio, while receiving a yearly income stream during their lifetime. After their death, the remaining assets in the fund go to charity.
One practical use of a charitable remainder trust can be as a planning technique to extend the payouts from an IRA. The Secure ACT of 2020 changed the rules for inherited IRAs, requiring all their assets to be distributed within 10 years, which can create a large income tax liability for descendants if there’s a large amount in the IRA. However, by naming a charitable remainder trust as the beneficiary of an IRA, payouts may be stretched out for up to 20 years.
Charitable remainder trusts have two subcategories: 1) Charitable remainder unitrusts, where the trust is revalued each year and a certain percentage of the fair market value comes back to the donor, and 2) charitable remainder annuity trusts, where the donor receives a fixed percentage of the initial value of the trust assets. Both are irrevocable, meaning that their basic structures can’t be altered; however, with a unitrust, the donor can continue to add assets, because it’s revalued each year. With an annuity trust, no additional money can be added, but an additional trust can be created to increase the payout amount.
In terms of tax benefits, the donor gets a tax deduction in the year their assets are donated to the charitable remainder trusts. However, any distributions from the trust to beneficiaries other than charities will incur income tax. While there is a cost involved to set up and maintain a trust, that amount is often dwarfed by the total tax savings that donors receive while also fulfilling charitable giving desires at the end of the trust’s term.
Planning for the next generation
When couples make their initial estate planning decisions, the intent is to provide for a situation in which either spouse outlives the other. But, statistically speaking, it’s often women who end up making the final estate planning decisions before money passes down to the next generation.
By using a charitable lead trust or charitable remainder trust, a female donor can adequately provide for the needs of her loved ones while also spreading financial benefits to charitable causes that are near and dear.
At Argent, we make the process of starting and administering a trust as easy as possible for donors. We ensure the terms of the trust document are followed: distribution of the assets is made appropriately; tax returns are completed and filed; communicate with beneficiaries, charities, and grantors; ongoing management of the assets of the trust.
If you’re interested in learning more about how a charitable lead or charitable remainder trust might work for your family, I or our other trust and estate planning advisors would be happy to assist. Call or email us to learn more.
