I received this question from V.S., of Forest Hills, N.Y., who wrote:

I am thinking of making a gift to charity. What are some of the benefits to my estate, in addition to my good feelings?

Dear V.S.:

There are many ways to share your wealth with others; giving to children, grandchildren, and charities are just a few examples. In addition to the joy of giving, you, as donor, may secure from charitable contributions a significant income tax deduction and possible avoidance of capital gains taxes. Increasing the satisfaction of helping a worthy cause, you may also reduce or eliminate estate taxes, and even diversify your investment portfolio.

These diverse objectives may be achieved through direct donations or through a type of tax-exempt trust known as a charitable remainder trust (CRT). In establishing a CRT, which is irrevocable, you may receive:

• an income tax deduction for the present value of the trust's remainder interest directed to the charity;
• lifetime annual income for you and another, including your spouse;
• the principal of the trust distributed to a designated charity; and
• your estate reduced by the assets transferred into the trust.

A CRT may offer substantial financial flexibility even to a middle income-bracket taxpayer who has held onto underperforming assets simply because they don't know about helpful alternatives. A donor often transfers to their CRT low-income or non-income producing assets, which have substantial capital appreciation, to be sold with the proceeds invested in an income-producing portfolio and no payment of capital gains taxes on the sale. In the case of a married couple, this income can last until the death of the surviving spouse when the principal of the trust will pass to the designated charity or charities. Thus, appreciated stock, undervalued real estate, or other appreciated assets can be converted into an income stream to provide college funds or retirement income while also assisting a worthwhile charitable cause.

You may establish a CRT by transferring debt-free assets into the irrevocable trust. If assets with debt attached, such as mortgaged real estate, are transferred into a trust, adverse tax consequences may endanger the tax-exempt status of the trust.

Many financial experts feel CRT's will continue to be a beneficial arrangement for both donors and recipients as the federal government looks increasingly to the private sector for financial support of social programs.

Because assets must be placed in an irrevocable trust to gain the full benefits of tax-exemption, the most likely candidates to set-up such a trust are persons age 60 or older who are willing to give up ownership of assets to accomplish their financial goals.

The biggest objection to this estate planning strategy may be that logical heirs are overlooked in passing on a family's accumulated assets. This situation can be easily rectified by using a portion of the income generated by the CRT to set-up a "wealth replacement" trust which then purchases a life insurance policy equal to the value of the CRT. The proceeds of this policy may, with proper planning, pass free from both income and estate taxation to children or other heirs at the death of the donor or their surviving spouse.

CRT's are governed by a complex network of regulations. To insure both the charitable contribution and full tax benefits, a CRT must be structured by an experienced estate planing team which may include a lawyer, CPA, insurance professional, and other financial specialists. Business owners as well as families and individuals can benefit from the use of CRT's in achieving both charitable and financial objectives.