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  • Trusts 101

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    Charitable Trusts: Altruism and Tax Breaks

    Small business owners who want to leverage their companies to benefit a favorite charity or other nonprofit organization may use one of two charitable trusts to achieve this altruistic goal. Both types of trusts are irrevocable, so you can’t change the terms or move their assets once established.

    Charitable Lead Trust. You transfer business shares, money from the sale of your business or other assets to this trust. You name a charity to receive the income from the trust for a specified period of time. You or another named beneficiary receives the remainder—what’s left in the trust when its term expires.

    Charitable Remainder Trust. Take the charitable lead trust, turn it on its head and you have a charitable remainder trust. This instrument names you or someone else the beneficiary of income, and then the nonprofit group or charity named in the trust document receives the remainder when the trust ends.

    Some caveats. The IRS must classify your charities as tax-exempt. The charity must be approved by the Internal Revenue Service as tax-exempt in order to receive tax benefits. The trustee of the trust, which can be a named charity or a financial institution, also needs to keep tax records.

    The Benefits of Giving
    Even if your charitable donations are completely altruistic, making them through a charitable trust offers tax benefits in two ways. The amount of your taxable income is reduced for income tax purposes, while you remove assets from your taxable estate. Assets that appreciate, such as securities, are especially attractive from a tax perspective. Charities don’t pay capital gains taxes, so the assets in these trusts grow faster than if the tax was owed.

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    Game Plan

    • As with all trusts, seek the help of a qualified estate planning attorney. You can find a directory of them from Lawyers.FindLaw.com and elsewhere. Also ask other professionals who created charitable trusts for a referral.
    • There are countless numbers of charities—and not all of them are legitimate. Make sure you pick the charities closest to your heart, perhaps some in which you can also volunteer your time and efforts.
    • Make sure your charities are legitimate by checking them out at CharityNavigator.org and here. The Federal Trade Commission also has more helpful information.