Giving to charity can be satisfying but can also reduce both your income taxes and estate taxes. With charitable giving you can receive a lifetime income, save on income and estate taxes, and give a gift to a worthy cause that you care about. Also, your favorite charity can start planning now for what it will do in the future because it knows that it will receive the gift at some point in the future.

One of the most frequently used types of charitable tax planning is the charitable remainder trust. It is a way you can convert a highly appreciated asset (for example, real estate or stocks) into a lifetime income without having to pay capital gains taxes on the sale or estate taxes upon your death. At the same time, you can help one or more charities or organizations that you care about.

Who Can Benefit From A Charitable Remainder Trust? Generally, if you are age 50 or older, own a highly appreciated asset, are in a higher income bracket, would like to benefit from the profits now but want to eliminate capital gains and estate taxes, and if you enjoy benefiting a charity or other non-profit organization, you will probably benefit from a charitable remainder trust.

How A Charitable Remainder Trust Works You transfer a highly appreciated asset into an irrevocable trust (the charitable remainder trust), naming one or more tax deductible qualified charities as the beneficiary. You can be the trustee, however, it is better to use a corporate or professional trustee to be sure that the trust receives the proper favorable tax treatment. The trustee then sells the asset at its full market value, paying no capital gains taxes, and re-invests the money in income-producing assets, which will grow tax-free. For the rest of your life, the trust will pay you income. When you die, the remaining trust assets (the principal value of the trust) then goes to the charity.

Why Not Sell The Property Yourself? You could sell the property yourself and reinvest the money, however, you would pay more in income and estate taxes and have less left for your beneficiaries. Let's go through an example.

Let's assume that 10 years ago you bought rental property for $100,000 that today is worth $500,000. Today, at age 65, you would rather cash in the property so you will not have to manage it anymore.

If you sell the property, you would have a capital gain of $400,000, which is taxable as ordinary income in the year you sell it. You would therefore have to pay approximately $112,000 in Federal income taxes. That gives you only $388,000 to re-invest.

When you die, Federal estate taxes (and Ohio estate taxes, however, Ohio estate taxes are at a much lower rate) will also have to be paid. Assuming that your entire estate at that time is $1,300,000. This would put you in an estate tax bracket that is higher than 37%. Therefore, you would lose over $144,000 from the property in estate taxes. That creates a total of over $256,000 in income and Federal estate taxes, leaving less than $244,000 of the original $500,000 for your beneficiaries.

What Will a Charitable Remainder Trust Do for You? If the asset were placed into a charitable remainder trust, it could be set up to allow you to receive income for life from the charitable remainder trust and a tax deduction of up to 50% of your income in the year the trust was set up (the deduction can be carried over for up to five more years if you do not have enough current taxable income to offset the deduction). To replace the value of the asset for your estate, the value of the tax deduction can be used to purchase life insurance to be put into an irrevocable trust for the benefit of your children. This way, you save all capital gains and estate taxes for that asset and guarantee income to yourself for the rest of your life. The savings in the above example is over half of the original value of the asset that will go to the charity.

There are other planning methods, however, this method has the added benefit of helping an organization that you believe in.