How to Guarantee Lifetime Income, Save Taxes and Help Charity

Since 1969, the federal tax code has authorized the use of a very powerful estate planning tool to reduce a taxpayer’s liability for capital gains taxes, income taxes, and estate taxes, all while guaranteeing a steady flow of income.  This tool is called a Charitable Remainder Trust.  Here is how it works.

You establish an irrevocable trust naming yourself as the trustee and contribute highly appreciated assets such as land, stock, and/or rental property to the trust.  The trust then liquidates the assets and makes annual, or more frequent, payments to you typically until you, and, if appropriate, your spouse, passes away.  What remains in the trust will pass to a qualified charity or charities. 

Based on your age and life expectancy, and the regular payment you elect to withdraw every year, usually 5% or more, you will obtain a current income tax charitable contribution deduction for the value of the charity’s future interest in the property.  The deduction is permitted when the trust is created, and if not entirely used, can be carried over up to five future years even though the charity has to wait for your death to receive anything.  In addition, the Charitable Remainder Trust is able to enhance investment returns because, under the law, the trust pays no income tax, capital gains tax, and the trustee may reinvest the full amount of the trust assets and generate more income in future years. 

The Charitable Remainder Trust is also not subject to estate taxes because they are assets are no longer in your estate when they pass to the qualified charity at your death.  If you are concerned because your children are not going to receive these assets, even though you received income from these assets and you received a charitable deduction for these assets, you could use some of the income flowing from the Charitable Remainder Trust on a year-to-year basis to buy a life insurance policy on yourself.  In doing this, the loss of these assets to your estate will be replaced by income tax free life insurance proceeds for your heirs. 

The Charitable Remainder Trust is a very attractive estate planning option for those with highly appreciated assets who need a steady future income while getting an immediate income tax deduction on their current income tax return.  If you would like to discuss whether a Charitable Remainder Trust might be appropriate for you, please feel free to call my office at 804-758-2244 or 757-877-2248 to schedule a free initial consultation.

Joseph T. Buxton III is the founder of TrustBuilders Law Group, Buxton and Buxton, PC with offices in Yorktown, Williamsburg, and Urbanna, VA.