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Charitable Trust: Oldest Strategy In The Game

Venture Capitlist: You are always on the go, and looking for the next big thing, you constantly have FOMO, and have had or will have investments that will cash out. The ORCA model is meant to help you with this, we understand you need money to invest in your companies and we also understand how confusing your taxes are, we want to help plan and use startegies like mentioned below for you to make the most out of all your investments.  

Charitable Trusts

You hear it in the news all the time, another billionaire has just given a majority of his wealth to charity, the most recent of them was Mark Zukerberg, who pledged 99% of his wealth to charity, now that is roughly 45 billion, yes, that is billion with a big fat B. Now, what would possess a person to do this? Is it the kindness of their heart? Do they just have that much money to give? Or could it be in their best interest? To be honest, it is a little bit of all, but mainly has to do with something called a Charitable Trust (CT). Now, if you are the average person reading this, you have probably never heard of a CT before, and if you are a venture capitalist or someone who is a wealthier individual then you may have heard of the term before. So what is it in layman’s term; Well, a charitable trust is simply a trust that gives either its earnings or lump sum to charity, in return the owner of the trust will receive an upfront tax write off that is calculated based on a lot of complicated metrics that include time, rates of return and pledged amount that charity will be getting, to be honest the details are as messy as a teenager boys room, you can see it from afar but you definitely do not want to deal with it. That is why you have us at Orca and our partner ecosystem to help clean that messy room up for you.

Often times these charitable trust are used when you have a huge income year. Say you owned stock in a company either as a Venture Capitalist or as an employee that just got acquired and you received a huge lump sum, or say you acquired some property that is now worth a significant amount and you are looking to sell it and cash out. First of all,  congratulations and, mazel tov! And don’t forget… .the government likes to celebrate with you by taking a significant amount of it away. Now, this is where our friend the charitable trust comes in, not only do you get to fulfill your philanthropic duty but you also are able to take tax write offs that are significant, so I mean a win, win right? Now let me explain that two main types of charitable trusts that are out there.

There is the Charitable Remainder Trust, and the Charitable Lead Trust, Lets start with the Charitable Remainder Trust. The key word to remember here Remainder, because the remainder of the account value after all the time has past will go to charity. Now the money that you have in the trust is not just sitting around, it is being invested and since you are required to take 5% distribution out at least yearly, (which means that you will get an income of at least 5% from your trust every year) anyone like the sound of lifetime income? I DO! Obviously you can change this percentage to 6% or 9% but that is best done when we run the numbers together and find the best situation for you. Remember I said remainder is key? Well the remainder of the money that is in your account after, most commonly your death or yours and your spouses combined death, will go to charity. I mean you get to leave a legacy or can even donate a hospital wing. The tax deduction is taken up front with some limitations based on type of asset donated to the trust. Any unused deductions carry forward to be used for up to 5 years after the year of contribution.  Now isn’t that a reason to celebrate?

On to the Charitable Lead Trust, now lets remember the key word here Lead, so just like remainder trust, there is this crazy formula and time amount that is pre determined. Now, unlike the remainder trust, this one leads off with giving the investment amount to charity, so the 5% we discussed will go straight to charity off the back, while your principal amount, lets say 1,000,000 remains in the account. The idea, is you get the 1,000,000 to yield 5% a year therefore; covering the donation to the charity every year, and what happens to the money when the time period expires? Well, lucky you, because you waited and gave the upfront investment money to charity, you now get to take all 1,000,000 or whatever is left in the account tax-free depending on the terms and investments in trust. Yes, you read that correctly. So, if you can afford to put your money away for a little, then this is a great solution for you, because not only do you get a tax break upfront, but you eventually could get your money tax free. And as you guessed the longer you can hold out, the bigger your upfront tax break will be. Oh, one more thing-these are set up as defective trusts-so like tax characteristics  of investments in the trust get passed to the donor,. I know a bit confusing ,but that is what you have us and our ecosystems of partners for.

Now, both of these are very complicated trusts to set up, but if you consult the right parties the tax write offs could be very beneficial and at the end of the day you get to give some money to a charity of your choice and isn’t that what really matters in life? Giving back. So, the next time you hear about some billionaire donating money to charity through their foundation or trust, understand that they are simply using one of the oldest strategies in the book, and you can utilize that strategy as well, feel free consult us and we will get you in touch with our ecosystem of partners that specializes in creating these. 

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