Giving Smarter While Helping Your Estate
Most investors choose annuity trusts, financial planners say, because the charitable payments are fixed. In a unitrust, as assets grow, the percentage going to charity gobbles up more and more money, leaving less for heirs.
When establishing either trust, the donor can opt to take an upfront income-tax deduction based on the trust's payments to charity. Many opt to forgo that deduction, though, because taking it requires that the donor pay taxes on the trust's investment gains.
That's exactly what Ms. Ridgley, the Ohio real-estate agent, did. To avoid paying taxes on any investment gains, she passed on taking an upfront income-tax deduction on her annual charitable payments. And she structured her annual charitable payments to make sure her children received as much benefit as possible.
Assuming the trust realized returns of at least 5.75% annually over eight years, "my daughters could then be able to each have ... the original amount that was put into the trust," Ms. Ridgley says.
She sends charitable payments from the trust to a donor-advised fund run by the Columbus Foundation. Ms. Ridgley, a part-time minister who has traveled on religious missions to Indonesia, Thailand and Israel, among other places, sends the bulk of her donations to the Christian Broadcasting Network and other Christian organizations.
Ms. Ridgley and her three daughters advise how the fund should dole out the payments. "It's been very meaningful to them as well," Ms. Ridgley says.
Charitable lead trusts do have some potential pitfalls. They are irrevocable, so once you put assets or cash in, you can't take them out. If the trust's assets go down in value over a long stretch, the benefit for heirs could be less, because the trust must make its charitable payments regardless of market conditions.
In addition, the money passing to heirs is a taxable gift, which in turn lowers your estate-tax exemption.