Charitable Trusts: Tax Breaks for Do-Gooders -P3

Theoretically, you can make the payments as high as you want. Practically, however, there are limits. First, the higher the payments, the lower your income tax deduction. Second, high payments might eat into principal, possibly even using it all up before the payment term is over and leaving nothing for the charity. Third, a charity is unlikely to accept a gift if it is likely, or even possible, that all the trust property will be paid back to you.
Percentage of Trust Assets
It's common to set your annual payment as a percentage of the value of the current worth of the trust property. For example, your trust document could specify that you will receive 7% of the value of the trust assets yearly. Each year the trust assets will be reappraised, and you will receive 7% of that amount.
Because you receive a percentage, not a flat dollar amount, if inflation (or wise investment) pushes up the dollar value of the assets, your payments go up accordingly. Under IRS rules, you must receive at least 5% of the value of the trust each year.
                                                                                                       Making the Most of a Charitable Trust
Felix, age 60, earns a very comfortable salary and has assets worth $3 million, including stock that he bought years ago for $400,000. The stock has appreciated enormously -- it's now worth $1.6 million -- but pays very little in dividends.
If Felix sold the stock and bought income-producing assets, he would owe capital gains tax of $240,000. Instead, he sets up a charitable remainder trust with his alma mater as the charitable beneficiary. Felix funds the trust with the stock.
For income tax purposes, his donation to the charity is the full market value of the stock, $1.6 million, less the amount Felix is likely to receive, based on his age and current interest rates. He takes this amount as a tax deduction over five years.
The charity, as trustee, sells the stock and receives a profit of $1.2 million, which is not taxed. The trustee reinvests this entire amount. The trust document requires Felix to be paid 6% of the trust value annually for life. He'll get $72,600 the first year; the amount will change each year as the value of the trust assets changes.
So far, Felix has avoided paying capital gain tax and turned an asset that paid little income into one that pays much more. But there is even more good news. Felix has also reduced his estate, and consequently the estate tax that will be due at his death. Felix has also given money to his school instead of to Uncle Sam. And he has a guaranteed income for life.
If Felix lives 20 more years, the trust will pay him at least $72,600 x 20, or $1,452,000. If the trustee invests the original $1.6 million wisely, it -- and the payments to Felix -- should increase significantly.