Charitable Remainder Trusts (CRTs) have long been popular among a certain class of “have your cake and eat it too” wealthy investors. CRTs allow donors to sell appreciated stock without paying capital gains, place them in trust and hang onto an income stream from those assets for life. There is, of course, a catch: when the owner dies, what remains in the trust goes to the charity of his or her choice. That’s no small matter, of course, but the tax advantage of avoiding a huge capital gain in life and moving money out of a taxable estate after death can make a charitable trust appealing to individuals or families who had never considered significant charitable giving.
What makes a CRT a tax planning tool for ordinary individuals - as opposed to just the filthy rich - is that it can be used to sell concentrated low-basis stock positions to diversify their portfolios without paying capital gains taxes. Thinking “highly appreciating” or “need to diversify? Don’t discount CRTs.
To see how it works, take the example of an individual who puts $100,000 in appreciated shares of Procter & Gamble into a CRT. An individual originally bought the shares for $20,000, giving her a capital gain of $80,000. If she sold the shares outright, she would owe 20 percent on an $80,000 appreciation, or $20,000 in taxes. That would leave her only $80,000 to reinvest. By selling the asset through the CRT, however, the whole $100,000 can be reinvested to feed her income stream.
CRTs offer other tax breaks. First, individuals get a current income tax deduction when the trust is funded that is based on the value of the portion that will ultimately go to charity. The charitable portion must be at least 10 percent of the original assets. That is, if an individual funds a trust with $100,000, she can receive up to $90,000 back in income over the life of the trust. The smaller the income an individual takes back, the greater the gift to charity, and hence the greater the immediate tax deduction. An individual can pass the income stream on to a family member as well, but that too will lower the current income tax deduction. And, the assets are also removed from an individual’s estate.
Choose the CRT that best meets your planning needs:
Basic CRTs
- CRAT, or charitable remainder annuity trust, pays the donor a fixed dollar amount each year (or quarter or month).
- CRUT, or charitable remainder unitrust, pays the donor a fixed percentage of the value of the trust assets.
Exotics
- NIMCRUTs and Flip CRUTs, allow clients to delay their income stream from the trust until some point in the future - say retirement.
- In a CLT, charitable lead trust, the cash flow is paid to charity and the remainder in the trust goes to your heirs.
Reprinted from Rightway Unlimited LLC. For more on Estate Planning opportunities, visit their web site at estateplanninginfo.com
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