Wealthy families and individuals can fulfill their philanthropic goals while saving on taxes and building up assets for themselves and their heirs, according to experts in charitable trusts at BNY Mellon Wealth Management.
The different ways of approaching charitable giving were addressed during a conference for financial advisors held by BNY Wednesday. The discussion was particularly timely, according to Timothy Barker, senior director for BNY Wealth Management, because BNY sees some improvements in the economy and particularly in corporate profits, which should prompt more wealthy people to start thinking about charitable giving.
One vehicle for generating income as you give to charity is a charitable lead annuity trust or CLAT, said Jackie W. Franey, also a BNY senior director.
A charitable lead trust provides for charity with an initial gift to the charity and annual donations over a set period of time, while producing income from investments along the way. The ending balance can then be transferred to heirs. The donor gets the tax deduction from the charitable gift to offset taxes paid on the income from the trust.
"If your clients have excess cash or assets they do not need, they create a good income source to fund a trust," Franey said. "The trust can be structured so that no taxes are due on it."
Another vehicle that combines philanthropy with income generation is a charitable remainder unit trust or CRUT, explained Joan Crain, a BNY senior director. Using a CRUT, money can be transferred to the trust more than once, rather than just making an initial contribution as with other trusts. At least 5% of the money must be paid out of the trust each year. The donor gets a tax deduction each year for the donation, which is taken off what the tax would be on the income generated.
The trust is a good vehicle for someone holding real estate that is paying low interest or someone holding a large block of company stock who wants to diversify the portfolio and make income on the investment, speakers said.
If the descendants of the donor are not enthusiastic about the money being given to charity, a life insurance policy can be purchased to replace the money given away, Crain said.
Speakers also spelled out the pros and cons of private foundations and donor advised funds.
Donors have more control over the charities or not-for-profits that benefit from a private foundation than they do over donor-advised trusts, Franey said. The income from either the CLAT or CRUT can be directed to a foundation or donor advised fund.