Maximize Your Philanthropy and Minimize Your Taxes with a Charitable Trust

Posted February 2024

Many financial experts agree that timing the market for optimal returns does not work out successfully for most investors. Being able to routinely purchase securities at their lowest value and sell them at their highest value is about as likely as winning the lottery. However, there are ways to time the market and optimize your charitable resources—not by attempting to predict market price movements but rather by making timely adjustments to a trust portfolio without being subject to taxation on the gain.

You may be one of the many with charitable intent who has decided for various reasons that it is time to make certain adjustments to your portfolio. Perhaps equities now compose a larger percentage of your portfolio than your target, so you decide to reduce your equity holdings. Maybe too much of your portfolio is concentrated in one or two stocks, and you believe it would be prudent to diversify. Possibly you believe that a certain sector will perform well over the next few years, and you need to sell some securities to generate cash to invest more heavily in that sector.

In all of these cases, you might hesitate because there is a tax cost. The tax rate on capital gain could be as high as 23.8%, depending on your income level. If you try to minimize taxes, you may diminish the future return on your portfolio—but if you reposition your portfolio, you will have a larger tax bill. It would be great if there were a way to divorce investment decisions from tax considerations.

Actually, you can do that, while also supporting our cause, by establishing a net-income charitable remainder unitrust. This entails transferring to the trust a selection of securities, particularly highly appreciated ones that you might want to sell before long. The trust would pay to you the lesser of the actual net income from the securities and a percentage (for example, 5%) of the value of trust assets as redetermined annually. In other words, the trust receives dividends and interest from the securities it holds and, in turn, pays that income (less any administrative expenses) to you.

Because the trust is tax-exempt, it can sell securities without paying tax on the gain. Thus the trustee of the trust can make buy-sell decisions based on the merits of holding or divesting of certain securities at this particular time. The trustee could be a financial institution of your choosing or you.

Another benefit of the trust is a substantial up-front charitable deduction that can reduce current income tax. Beyond the financial benefits is the satisfaction of knowing that when the trust terminates, the remaining capital will be used to advance our organization’s mission.

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