What do you get when you cross an entrepreneur with a philanthropist? A “philanthropreneur.” Philanthropreneurs have made news lately. Jeff Bezos of Amazon.com bought The Washington Post; Red Sox owner Paul Henry agreed to nurture The Boston Globe; and hedge-fund tycoon John A. Paulson rescued the venerable Steinway piano company. Their common goal: preservation and enhancement of organizations that they believe contribute more to society than they are likely to earn in profits.
A pioneer philanthropreneur was actor Paul Newman. A generation ago he began to market a commercial version of his home-made salad dressing, pledging to give away all profits. Now vastly expanded, Newman’s Own food company has generated hundreds of millions of dollars for charity.
For those who are charitably inclined but whose wealth isn’t of so great a magnitude, a charitable trust may be a good alternative to explore, especially by those who own appreciated assets. A charitable deduction will be based upon the full market value of the property donated to the trust, without diminution for taxes on capital gains. The donor may reserve income from the trust for life, or for joint lives in the case of a couple. That reduces the value of the income tax deduction. Here are three fictitious examples.
The software executives: Jack and Jill worked for a software start-up, and they received a series of stock options. The value of the shares took off. After 20 years they created a charitable remainder unitrust for the shares, naming their alma mater as final beneficiary. The trustee sold the shares, investing the full value of the proceeds in a diversified investment portfolio. The couple will receive 6% of the value of the trust assets each year for the rest of their lives. The cash flow is enough to permit them to start new careers—in politics!
The retiree: Norman reached age 65 with a stock portfolio and an IRA worth $100,000. He wanted to convert to a Roth IRA but was concerned about the tax cost. Solution: create a charitable remainder annuity trust, donating appreciated stocks to the trust. The charitable deduction from that transaction will help offset the one-time taxes on the Roth conversion. Norman has been a lifelong member of and volunteer at a local museum, so he named it as his remainder beneficiary. He also reserved for himself a 5% annuity from the trust, to be paid for the rest of his life.
The heir: Marge was financially well settled when she inherited a beachfront house from her uncle. She didn’t need another house. Marge arranged for a charitable remainder trust to take title to the beach house and sell it. The trust will pay income to her, and at her death the remaining assets will pass to her church.
To learn more about how a charitable trust may benefit you and your family, talk with your tax advisor soon.