The benefits of charitable remainder trusts seem clear enough: Clients get a tax deduction, eliminate capital gains taxes for long-held and appreciated securities and benefit from an income stream that may last 20 years.
So do the disadvantages: An attorney has to draft the trust documents, and a tax professional will have to perform yearly reporting and compliance.
Yet one element of charitable remainder trusts is too often glossed over: The clients are giving up the steering wheel.
"You are giving up control of your money," says Steven Merkel, an advisor with Ciccarelli Advisory Services in Naples, Fla., which manages $1 billion.
Before helping his clients establish a charitable remainder trust, Merkel makes sure that clients will not be depending on the income stream generated from the assets they intend to put in the trust. Why? Since the clients have given up control of the assets, that income stream no longer qualifies as reliable, he says. "We make sure that if they are getting $12,000 from the trust, that money isn’t needed to cover their current living expenses," he says.
Unforeseen financial events -- a sudden large jump in income stream, or a bump in long-held assets' value -- may prompt clients to embrace the idea of a charitable remainder trust. But the tax advantages of a charitable remainder trust shouldn't divert clients’ understanding that the trust is irrevocable.
The primary objective should remain giving to worthy causes, says Tim Maurer, the director of personal finance for Charleston, S. C.-based BAM Alliance, which has $23 billion in assets under management.
"Don’t allow the investment benefits or tax privileges or preferences to be the only reason you are going to go down this path," says Maurer, author of The Ultimate Financial Plan: Balancing Your Money and Life. "You are not likely to find that you and your heirs are going to be better off as a result. It should not be seen as an edge for investing. You should do it because you have a charitable intent," Maurer says.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.