How to make money by giving it away
It’s good to give and receive
by Ric Edelman ’80

ake money by giving it away? That might sound a little crazy. But you can do it, through the little-known Charitable Remainder Trust (CRT). In fact, with the CRT, you can lower your current income taxes, avoid capital gains taxes, maintain or even increase your income for life, donate large sums to charity and still leave everything to your kids and grandkids.

Sound good? Read on
You establish a trust with some of your assets, such as stocks, bonds or real estate. You then name a favorite charity as beneficiary. You get an immediate income tax deduction because the gift is irrevocable, although the charity must wait for the death of you and your spouse before receiving your gift.

Next, the trust converts these assets into income-producing ones (if they aren’t already). If you donated land, for example, you might have the trust sell the property and buy bonds. Don’t worry about capital gains taxes, either, because a charitable trust doesn’t pay any taxes. (If the asset had appreciated, you would have lost a third of the value to taxes if you had sold them yourself. But the trust can sell the assets for you—tax free.)

This trust annually must pay out at least five percent of its initial market value. You decide who gets the income, how much they get and for how long—and you can name yourself if you want.

Assuming you take the income for as long as you or your spouse live, the charity will receive whatever’s left at the second death. But what about your kids? After all, their inheritance is going to charity.

To replace that inheritance, the trust buys an insurance policy on you and your spouse equal to the size of your gift, naming your children (or whomever) as beneficiaries.
Premiums are paid from the income produced by the trust’s assets and, upon the last death, they’ll receive the policy’s death benefit—which is as much as they would have gotten had you left the original assets to them in the first place.

And here’s another advantage: Because your heirs receive their inheritance from insurance, not your estate, the cash passes to the kids free of income taxes, estate taxes and probate.

These trusts once made sense only when giving away millions of dollars. But today, you can set up a CRT at little cost or effort for gifts as small as $20,000.
So take a close look at these trusts. You could help yourself, your family and charity.

The fine print
You can name more than one person or organization to receive income, but at the
least one must be a non-charity. You must specify whether the payouts are to be in dollars or percentages. Your tax deduction is based on a complex formula involving the value of the trust’s assets, the annual income you’re to receive and how long you’re to receive it. The IRS publishes tables determining these figures. Also, there are limits on tax deductions for charitable gifts and the Alternative Minimum Tax could apply if your gift involves appreciated property.

Use your IRA for bequests to the CRT
Another good idea if you want to make bequests to a CRT is to donate your IRA (or
a portion of it) instead of your cash or other assets. Why? Because when you make a
donation from your IRA, you avoid both the estate tax and the income tax on that money. That reduces your taxes and increases the amount you leave for your family—or the charity itself.

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Ric Edelman CFS, RFC, CMFC, CRC is chairman of Edelman Financial Services Inc. and best-selling author of The New Rules of Money, The Truth about Money and Ordinary People, Extra-ordinary Wealth. He hosts two award-winning radio and television shows, publishes his own newsletter, is a syndicated columnist and a highly acclaimed speaker. He can be reached by e-mail or by phone at 703-818-0800.