Income Tax Charitable Deduction: By establishing an Accelerated Charitable Trust and irrevocably transferring appreciated assets to the Trust, you realize an immediate charitable contribution deduction which can be used to lower your current income tax liability. When appreciated assets are transferred to the Trust, the income tax charitable deduction you may claim in a given year is limited to 30% of your adjusted gross income. Any portion of the charitable deduction may be utilized for five subsequent years, again limited to 30% of your adjusted gross income in each taxable year.
Minimize Ordinary Income Tax or Capital Gains Tax: In addition to the tax savings derived from the charitable deduction, you also avoid paying a large ordinary income tax or capital gains tax bill resulting from the sale of the appreciated asset which you donated to the Trust. As a result, 100% of the net proceeds from the sale can be reinvested to provide for heightened investment return and enhancement of the Trusts annual income distribution. You will incur some tax on income that is distributed to you, but not all will be taxed at the ordinary income tax rate. Some portion of most of the distributions you will receive will be taxed at a lower, capital gains rate or will be tax exempt. Any tax liability is more than offset by the increased earnings available through the Trust. Since the Trust avoids the ordinary income tax or capital gains tax due upon the sale of highly appreciated stock or other assets, the Trust retains the amount of the ordinary income tax or capital gains tax bills (approximately 45.55% or 24%, respectively, of the value of the stock or other asset) in its possession as principal and produces an investment return for you. The Accelerated Charitable Trust therefore, is a great mechanism for converting a low basis, low yield investment to a higher yielding investment without incurring the ordinary income tax or capital gains tax up front.
Tax-Free Compounding: Another substantial benefit of the Accelerated Charitable Trust is the potential for an increase in your post-tax disposable income. Because an Accelerated Charitable Trust has the ability to allow funds to compound on a tax-free basis without contribution limitations, it provides tremendous investment performance. The tax-free compounding effect is substantially similar to an IRA or 401K illustration you may have seen, but the total financial benefits are exponentially enhanced because of the Trusts possession of 100% of the value of the contributed asset.
Income-Only Unitrust as a Retirement Vehicle: By establishing a net income Unitrust and devoting the assets to high growth, low dividend investments, the Unitrust can defer the distribution of income until you retire, or at the end of the Trusts term. In that way, the revenues can continue to compound on a tax free basis. The income is sheltered from tax until such time and to such extent as it is needed or wanted by you. This is accomplished by having the trustee invest Trust assets in non-income producing property such as certain securities, real property or zero-coupon bonds. At such time as you want to receive income, the trustee will convert the assets to a form yielding high income. Generally, Accelerated Charitable Trusts, because of their short period or term of existence, do not pursue this capability.