John Brennan, Senior Vice President of Trust and Financial Services, Cape Ann Savings Bank, talks with John Maher about charitable trusts. He explains why people use these trusts instead of giving money directly to charities, and he briefly explains their tax advantages.
Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Martin. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today we're talking about charitable trusts. Welcome John.
John Brennan: Hi John.
What Is a Charitable Trust?
John Maher: So John, what is a charitable trust?
John Brennan: Well John, fortunately, a charitable trust is pretty much what it sounds like. There's a lot of obscure terms and convoluted things to explain in the trust world. This is relatively straightforward. A charitable trust is a trust that exists to further a charitable purpose, and it typically has the benefit of the donor, or it benefits the donor or the creator at some juncture.
Types of Charitable Trusts
John Maher: Okay. What are some of the types of charitable trusts?
John Brennan: Well, there's really two major types of charitable trusts. The first is known affectionately as the CRAT. A CRAT is a charitable remainder annuity trust, or just a charitable remainder trust. What happens, and I'm simplifying here, these trusts get complicated, but this is a short form answer.
In a charitable remainder trust, a donor or trust maker or grantor, makes a gift to a trust, those assets then within the trust are sold. And then there's usually an annuity or a stream of income that benefits the donor, typically a fixed percentage on an annual basis.
And then when the donor passes away, or a term of years is met such as 20 years, which I believe is the longest term you can have for this type of trust, the remaining assets within the trust go to charity. You create a charitable remainder trust once, and you typically create it with a gift which has appreciated, meaning it would be onerous from a tax perspective to sell it.
The other major type of charitable trust is a charitable remainder unitrust. Now, both of these trusts are very similar, both trusts begin with a gift. A charitable remainder unitrust gives out a percentage of the trust's assets each year, and the remainder goes to charity. However, there's more variability with charitable remainder unitrusts. There are more types. It is not created once. It has the ability to accept additional assets. And there are terms and types of this type of trust, which just really make it more robust from a planning perspective... a charitable remainder unitrust could be more sustained with its ability to keep accepting property.
How Do You Create a Charitable Trust?
John Maher: Okay, what's the first step here? How do you go about creating a charitable trust?
John Brennan: Well, the first thing you do is, like any trust, you'd have to create it. However, with this type of trust, there's terms which are driven by IRS regulations or statute or law. There's terms that would be contained within the trust that are derived from tax law. But a simple answer is you create this trust with a gift, very commonly you would use appreciated stock. Why would you use appreciated stock? Because there's a favorable tax treatment with this type of trust.
Pros and Cons of a Charitable Trust
John Maher: Okay. And then what are some of the pros and cons of a charitable trust?
John Brennan: Well, the pros and cons of the charitable trust is that somebody could... let's say you worked for Microsoft and you bought the stock for a dollar. Now, 20 years later, it's worth millions. And if you had to sell that stock, you would be hit with enormous capital gains.
The advantage with these types of trusts is you are able to give away these appreciated assets and you are able to receive the tax benefit of a charitable donation when you give that gift. And then that appreciated stock in terms becomes beneficial to the trust maker or the donor by turning it into a stream of income. So the charity gets a benefit, the donor gets a benefit in the ability to write off the appreciated asset, and the donor also potentially gets the benefit by directing the stream of income or beneficial interest that comes off that asset to an individual, themselves, a loved one, et cetera.
Tax Implications of Charitable Trusts
John Maher: Can you talk a little bit more about the tax implications of using a charitable trust?
John Brennan: Well, the big thing is, and I alluded to this in the earlier answer, is that ability to get a charitable deduction, essentially the tax benefit of the donation of that appreciated asset, okay. You sell it without the implications of capital gains. You're not paying for all those capital gains when you sell it, because that happens within the trust. So if you have a million dollars and as opposed to getting a $900,000 capital gain, which you pay at least say 20% of as tax, you give that asset into the trust. You get the benefit of donating that appreciated asset, that tax benefit you get for making that charitable donation. You're not paying capital gain. And then that trust, in turn, not only benefits your favorite charity, but it gives an interest that you could give back to yourself in terms of annuity that the trust creates, or it directs that to a loved one.
And it also gets that appreciated asset out of your estate, potentially reducing your estate tax obligation, while also benefiting someone of your choice or your loved one and the charity. So as you can imagine, there's a lot of... when you think of a nonprofit and they have a development office, this is what development officers hope to get. They hope to have a generous donor, so that development officer is hoping that a wealthy, generous donor will create a charitable trust which both benefits the individual from a tax perspective, from an income stream of benefits perspective, and also charitable perspective in that it sustains and benefits that charity that they cared about.
John Maher: All right. Any final thoughts or can you summarize your ideas on charitable trusts?
John Brennan: No, just there's a lot of variability here and, like I said, the most common use here is appreciated assets and that donor's desire to sustain and confer benefit onto that charity that they cared about.
John Brennan: Sure thing, John.
Contact Cape Ann Savings and Trust to Talk About Charitable Trusts
John Maher: And for more information, you can contact Cape Ann Savings Trust & Financial Services at 978-283-7079. Or visit the website at capeannsavings.bank
Investments purchased through the Cape Ann Savings Trust & Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.