Wealth is not defined only by net worth, rather by what your net worth is comprised of!
Estate and Charitable planning is best implemented with a holistic approach that identifies and integrates the multitude of types of assets that comprise wealth. Cash & Investments, Annual Income, real estate holdings, Insurance, Retirement & Pension Accounts, as well as the most important issue, Family & Legacy planning as you define it.
Here the focus is primarily tax planning where the money you contribute to a charity of your choosing is now an acceptable IRS Tax Deduction in that year.
The first thing to understand is that these acronyms stand for a type of Trust you create with you as the primary or contingent beneficiary while you are alive. CRT means Charitable Remainder Trust. CRAT means Charitable Remainder Annuity Trust. CRUT means Charitable Remainder Uni Trust.
The focus once again of these strategies primarily on tax planning, by strategically giving some money to an existing charity. However, the implementation of these strategies is gradual over a 5-20 year period.
An example would be to have an asset that has appreciated in value, where your acquisition cost is low but the current value is high. If you sell it you will realize capital gains which are taxable in that year of sale.
Example: a real estate holding, appreciated stock or other investments, even an entire investment portfolio, or an established business you wish to sell. The worth is now $1.0 Million, but your cost basis is $100K. The gain if sold would be $900K. The Capital Gain Tax would be approx. 25% or close to $250K.
A CRT, CRAT, or CRUT, are structured so that you gift this asset to the Charitable Trust and the Trustee of the trust sells the asset. Because the Trust is a Charitable Trust structured with an existing 501( c) (3) charity as its beneficiary, the sale of the appreciated asset avoids any Capital Gain treatment applied to the sale. You, the client, choose whether to have an Income Stream coming to you for a set period of years, with the balance going to the Charity, or, choose an income stream to the Charity, with a balance coming back to your or your heirs.
Here, that amount going to the charity becomes your charitable deduction which then can be used to offset your annual income taxes liability. This is a simplified explanation as the issues here are much more complicated, and reserved for a one-on-one discussion.
These charitable options are much touted these days by the likes of PBS and even some Mutual Fund companies for their simplicity. You donate the money to the Donor Advised Fund, reserving the ability to direct to which charities the money goes to and in what increments. It offers the opportunity to create an easy method for charitable giving as an alternative to creating your own Private Foundation with your family name, like the Bill and Melinda Gates Foundation.
However, a donor advised fund may have some disadvantages versus a private foundation in that a private foundation can accept donations from others. For example, Warrant Buffet will be gifting most of his estate to the Bill and Melinda Gates Foundation. This can be a significant consideration in some cases. In addition, the founders/board of a private foundation have complete control over where its giving goes within broad legal bounds.
In a donor advised fund, technically, the donor only advises the sponsoring organization as to where they wish the money should go. While rare, a sponsoring organization could conceivably alter the donor's intent. In other words, you the donor do not have ultimate control. In addition, most donor advised funds can only give to IRS certified 501(c)(3) organizations or their foreign equivalents, ruling out, for example, charitable giving in individuals in the form of Grants or scholarships, both things a private foundation can more easily do. Finally, while a foundation can exist theoretically for generations and isi an excellent multi-generation legacy vehicle, most Donor Advised Funds impose a "sunset", after which they collapse individual funds remaining in the fund into their general charity pool.
A private foundation is a legal entity set up by an individual, a family or a group of individuals, for charitable giving, wherein the donor and their spouse or significant other, as well as children and other heirs and/or friends can be the operational individuals behind the Foundation. For example, the Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets. It is run by Bill and Melinda Gates along with a Board of Directors they have chosen. It is run much like a corporation is run.
Most private foundations however are not that sophisticated in structure and are rund by the individual donor themselves as a retirement and estate planning mechanism. Theay are much smaller in terms of dollars with a large majority of the more than 84,000 filing with the IRS in 2008 have less than $1 million in assets and 93% have less than $10 million. In the USA,, generally, private foundations control over $628 billion in assets and provide in excess of $44 billion in charitable contributions annually. Next time you watch a PBS special, note the name of the contributors who made that show possible. You will see the names of families, and some have become house-hold names.
The tax treatment of creating a private foundation provides a charitable deduction over a period of five years. For example, $1 Million donated to your private foundation is deducted at the rate of 30% of adjusted gross income (AGI). If income in year one is $1 Million, then $300K is taken off the top, and you are now left with an additional $700K to deduct over the next 4 years. If income in year two is $500K, the deduction taken would equal $150K of what is carried forward, leaving $550K as your carry forward charitable deduction amount to be used over the next 3 years. You would then need income over the next 3 years to equal approximately $1.8 Million in order touse up the remainder of the charitable deduction available to you from that initial contribution of $1 Million to the private foundation.
Lastly, the legal requirement is that each year, you must dish out at least 5% of the total dollar amount in the Foundation for charitable purposes.