A charitable remainder trust is a “split interest” charitable planning tool that allows a donor to transfer an asset to an irrevocable trust, receive income for life, and earmark what’s left (the “remainder”) to pass to charities of choice.

Your donor advised fund can serve as the recipient of the assets remaining in the trust.

The terms of the fund can be updated, alongside creating the charitable remainder trust, to accommodate your intentions for distributions to your favorite charities. In this way, you can achieve your goal to leave a meaningful legacy to all of your favorite causes.

Here’s why this works so well.

Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, here’s an example to help you understand what happens from a tax perspective:

A donor named Tom has property that he bought for $200,000 and is now worth $2 million.

When Tom transfers the property to the trust at a fair market value of $2 million with a cost basis of $200,000, and then the trust sells the property, the trust itself does not pay tax on the $1.8 million capital gain. Tom would have had to pay this tax if he had sold the property himself.

  • This leaves the full $2 million in the trust to be invested for growth, subject to Tom’s lifetime income payments.
  • Tom is eligible for a potentially significant charitable income tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream.
  • Lifetime payments to Tom (in an annual amount equal to at least 5% of trust assets) generally are subject to income tax during each year of the distributions, but the overall income tax hit to Tom likely will be less than if he had transacted an outright sale.
  • Because the charitable remainder trust is an irrevocable trust, the property and the sale proceeds (other than what winds up in Tom’s estate from any unspent income stream payments) are excluded from Tom’s estate for estate tax purposes.

Contrast this with an alternative scenario in which Tom had sold the property, realized a $1.8 million capital gain, paid tax on that gain, and made gifts to charities from what was left, holding back enough to live on. And, in that situation, the proceeds would be included in Tom’s estate tax purposes. Ouch!

The Community Foundation can help you with your legacy wishes, and a donor advised fund at the community foundation can be an excellent landing spot for complex gifts.

The team at the community foundation is here for you! Contact us:

Marcia Shackelford, Chief Philanthropy Officer
609.219.1800 Ext. 809 or email Marcia

Michael Nuno, Vice President, Philanthropic Services
609.219.1800 Ext. 808 or email Michael

For more information or support, please contact:

Marcia Shackelford
Chief Philanthropy Officer
Email Marcia Shackelford

Michael Nuno
Vice President, Philanthropic Services
Email Michael Nuno