Charitable contributions remain an important part of most financial and estate plans. That's because charitable contributions offer the donor not only long-term financial benefits and personal satisfaction, but also significant tax savings.

Although income tax rates have been reduced, they still remain high enough to sting. In 2002 and 2003 the highest rate remains at 38.6 percent and only slips to 35 percent for tax years 2006 through 2010. And, although the federal estate tax is supposed to be phased out and repealed, Congress recently failed to make the repeal permanent. That means the repeal only applies to decedents dying in 2010 between now and 2010 and again in 2011 the estate tax remains with us.

People sometimes balk at charitable contributions because they think they have to make outright gifts of their assets to obtain a charitable deduction. But, that's the beauty of the charitable remainder trust (CRT) you can retain the income from your charitable contributions and still obtain a charitable deduction.

What's deductible, what's not

CRTs come in two forms: the Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unitrust (CRUT). With both the CRAT and CRUT you transfer property to a trust that you create, but you (or some other non-charitable beneficiary you designate) continue to enjoy the income from the property for life or for a term-of-years not to exceed 20 years. Following your death or expiration of the trust term, whatever is left in the trust (the remainder interest) passes to your favorite charity.

A CRUT has to pay at least 5 percent and no more than 50 percent of the trust property as valued annually to you (or another non-charitable beneficiary) each year. A CRAT must pay the non-charitable beneficiary an amount equal to at least 5 percent and no more than 50 percent of the initial value of the trust property.

Because the payout under the CRUT is based the value of the trust each year, the payout increases, if the value of the trust property appreciates. That's good, if you want to retain an income from the CRT that can keep pace with inflation.

For example, let's say you make a $500,000 contribution to a 20-year CRUT. Let's also say that under the terms of the trust, you are entitled to receive 10 percent of the value of the trust property each year. The first year's payout is $50,000. If the underlying property appreciates at 12 percent during the course of the first year, the property value before the first year's payout will be $560,000. After the payout, the property value is $510,000. The payout in the second year is 10 percent of the re-valued property, or 10 percent of $510,000, $51,000.

Because you retain the right to receive the income from the trust property, you are not allowed to deduct the entire value of the property contributed to the CRT for income tax purposes. Instead, only the present value of the remainder interest estimated to eventually pass to the charity is currently deductible.

Using IRS tables and assuming that the trust property appreciates at 7 percent annually, your $500,000 gift to charity in 20 years gets you an approximately $61,000 income tax deduction this year.

In addition, there are no gift taxes on the value of the gift to charity and if you are

the sole non-charitable beneficiary, there is no gift of the income interest. On the other hand, if you designate someone else as the non-charitable beneficiary, the transfer is subject to federal gift taxation. For example, if you designate your daughter as the non-charitable beneficiary for the 20-year term of that $500,000 CRUT, you've made a gift worth approximately $439,000 to her.

For estate tax purposes, the value of the CRT is included in your gross estate, but you receive an offsetting estate tax charitable deduction that eliminates any estate tax attributable to the CRT. Even if the value of the property in the CRT doubles in value to $1 million, and you've received the income from the trust right up until the time of your death, the entire $ 1 million dollars passes tax free to charity.

That's why it's called having your cake and eating it too.

Wealth replacement

The only downside with the CRT is that the property placed in trust will not be available for your heirs it goes to charity. But, what if you used a portion of the income you retained from the trust to buy life insurance for the benefit of your heirs? For an annual premium outlay, you could benefit your favorite charity, while making sure your heirs are cared for.

Now, that's really having your cake and eating it too.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )