Estate Planning
| The benefits of charitable giving with CRTs |
| Published Wednesday, May 13, 2009 8:00 am |
The key benefit of establishing a CRT is that it enables you to leave money to charity in the future, while continuing to draw income from the money now. In addition, it can offer several tax benefits, including a current income tax deduction and a way to liquidate assets that may have appreciated significantly without paying capital gains taxes. And all this is in addition to potential estate tax benefits.
Although complex in detail, the CRT is simple in concept. If properly structured:
- You receive a current income tax deduction for the present value of the future gift to the charity and income from the trust assets during your lifetime (and that of your spouse)
- You may avoid capital gains taxes on appreciated property contributed to the trust even if the trust sells the property to generate income or cash flow
- Charity receives remainder of trust assets after your death
- Your estate avoids potential estate taxes on amount in trust
Example of CRT benefits
To understand the benefits of a CRT, an example is helpful. The Smiths are a couple in their 60s with two grown children. The Smiths would like to benefit their alma mater, while still generating current income and leaving a legacy to their children.
Assume that the Smiths contribute appreciated assets (securities, real estate, etc.) worth $1,000,000 to a CRT which sells the assets and reinvests the $1,000,000 proceeds in assets that earn 5% per year. Assuming the CRT pays its income to the Smiths annually, the Smiths will receive a $50,000 payment each year before income taxes. Upon the death of the surviving spouse, the college will receive $1,000,000.
Assuming the Smiths had a $200,000 basis in the contributed assets, capital gain taxes of $120,000 would have applied if the Smiths sold the assets directly. Accordingly, they would have had only $800,000 to reinvest. Since no capital gains taxes apply when the CRT sells the assets, the CRT can reinvest the full $1,000,000 contributed. Also, assuming the Smiths receive an income tax deduction for the present value of the future gift to charity, a portion of the cash flow created by the deduction and a portion of the annual income they receive from the CRT could be used to purchase life insurance through an irrevocable life insurance trust established for their heirs. Thus, there can be a win-win for everyone – the Smiths can received annual income, the children can receive a legacy and the college can receive a significant gift.
The Basics of CRTs
Because a Charitable Remainder Trust is irrevocable, you cannot change your mind once it has been created. However, you may be able to change the charitable beneficiary. You can also have the income paid to someone other than yourself, though this may trigger a gift tax liability.
All types of CRTs involve complex rules for income payouts, current tax deductions, and other issues. Please consult your trusted advisor regarding your individual situation.
Timothy R. Devlin, CPA is a member of the firm's Executive Committee and the Partner in charge of the Tax Services Department. With over 20 years of experience, he specializes in corporate tax planning, stock-based planning, multiple entity structures, related cross-entity planning and succession planning. The primary goal of his practice is to assist clients in reducing their total tax liability, make tax-efficient investment decisions and develop financial structures that provide maximum tax advantages. Contact Tim directly via email at tdevlin@daszkalbolton.com or by phone at 561.953.1520.
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