Special types of trusts can be created to make gifts to charity and generate special income tax deductions on those gifts. Both charitable remainder trusts and charitable lead trusts are IRS-approved estate planning tools for making charitable donations in a manner that allows the donor to choose the timing and amount of the donor’s charitable deductions. This flexibility allows the donor to design a financial plan that uses charitable deductions, avoided capital gains and sheltered income to achieve a greater overall financial return. The results achieved depend on variables such as life expectancy, discount rates, built-in appreciation, and the donor’s goals. The donor’s accounting and tax experts must assist in setting up these particular trusts.
The income from property placed in a charitable remainder trust is paid to the donor during life. At the donor’s death or after a specified period of time, the property is transferred to the charity. The donor at the creation of this trust realizes an immediate income tax deduction for the remainder value of the property based on the donor’s life expectancy. This type of trust can be used with highly appreciated income property to generate substantial estate and income tax savings.
The income from property placed in a charitable lead trust is donated to charity and generates income tax deductions to the donor on an annual basis. At the donor’s death or after a specified period of time, the trust terminates and the property is transferred to donor’s intended beneficiaries. This type of trust can be used with high-income property to create large annual deductions while keeping the principal in the donor’s estate for passing to lower generations.