How to make money by giving it away
Its good to give and receive
by Ric Edelman 80
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 arent already). If you donated land, for example,
you might have the trust sell the property and buy bonds. Dont
worry about capital gains taxes, either, because a charitable trust
doesnt 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 youtax 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 longand 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 whatevers left at the second death.
But what about your kids? After all, their inheritance is going
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 trusts assets
and, upon the last death, theyll receive the policys
death benefitwhich is as much as they would have gotten had
you left the original assets to them in the first place.
And heres 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 trusts assets,
the annual income youre to receive and how long youre
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
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 familyor the charity itself.
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.