As I write this month’s column we are in the midst of preparing for high school graduations. When I listen to my team members talk about high school and pending deadline for their child’s choice of college, it is scary. They talk about having to spend $30, $40 or $50 thousand for a year of college and hope that their child can earn a scholarship to help alleviate some of the burden.
For those of you who have a charitable intent in your estate plan, establishing a scholarship through a charitable remainder trust is something you should consider. What is a charitable remainder trust?
A charitable remainder trust is a way of dividing your wealth between individuals and charitable beneficiaries. For Individuals such as you and your spouse, and/or other family members, there are no restrictions—receive the income from the charitable trust. The trust may last for a set number of years, or for the life of an income beneficiary, or for the joint lives of more than one beneficiary. When the trust finally ends, the charity receives all the remaining assets.
Usually distributions from the trust are determined by one of two methods. One method is called a charitable remainder annuity trust, meaning a specific dollar amount is paid every year to the income beneficiary, regardless of what happens in the financial markets. The other common method is called a charitable remainder unitrust, from which a specific percentage of the trust’s value is paid out each year. The advantage of the unitrust is that the amount of income will go up over time as the value of the trust assets goes up. That offers the possibility of inflation protection.
Income and gift tax charitable deductions are available when the charitable trust is funded. The charitable deduction is also age based. Another important benefit is tax-free diversification of concentrated holdings when gifted to the Charitable Remainder Trust. When an appreciated asset is transferred to the charitable trust, the tax deductions are determined by full fair market value. If the trust sells the asset, there is no tax on the capital gain—in effect; the capital gains tax is forgiven. There are numerous benefits to establishing a charitable reminder trust. Speak with an estate planning or elder law attorney about CRT’s.
Last year I wrote about a couple I helped for many years. They had no children and they were charitably inclined. In their estate plan they established a Charitable Remainder Unitrust that established scholarships for students graduating from Manchester Township, NJ high school. We converted the CRT to a trust in perpetuity. Last year we awarded $81,000 in scholarships to the graduating class of 2015 in the name of C. Edward and Helen Enroth. We can’t wait to distribute scholarships to the class of 2016!