Exploring the Benefits of the Charitable Remainder Trust
As we continue to reach all time highs in the stock market, many of my clients have been searching for ways to alleviate the tax burden on highly appreciated assets in their portfolios. Although the Charitable Remainder Trust (CRT) is not right for everyone, our current economy warrants a discussion on this tax-savings tool.
Are you rich in assets but low on current income and own an asset that will incur a substantial capital gains tax if sold? If this is the case, and you are in the position to make a charitable donation, a CRT may be right for you. The CRT is essentially a specialized irrevocable trust with significant tax benefits.
How do I start a CRT?
1. Meet with your estate planning attorney to decide if the instrument will be beneficial. Once it is determined that it is a good option for you, the attorney will create an irrevocable trust.
2. Re-title the assets you wish to donate to charity in the name of the trust. Remember, to get the full benefit of the CRT, these assets will be those that will incur substantial capital gains tax if sold.
3. Choose an IRS-approved charity to which you want to donate.
4. The charity will then be tasked with selling the asset and reinvesting the proceeds. The CRT will determine how the charity will pay a portion of the income the new investments accumulate to the donor. The donor can choose whether the payments are to be made throughout a set number of years or as a set percentage. (There are some limitations on the payout structure that are more complex and may require further explanation.)
5. At the termination of the trust the charity retains the remaining assets.
What are the benefits of choosing a Charitable Remainder Trust?
• The original asset will no longer be in the donor’s estate therefore reducing estate tax burden.
• When the charity sells the asset there is no capital gains tax on the increase in value of the asset.
• You receive an immediate income tax deduction in the amount you donate less the amount you expect to receive in return (This must be spread over 5 years.).
• Depending on the classification of the income received from the trust, you may not have to pay taxes on portions of the distributions.
• You get the warm and fuzzies when donating to your favorite charity.
Again, this tool may not be right for everyone. If you have experienced a significant increase in asset value and have charitable tendencies, you may want to discuss the CRT with an experienced estate planning attorney.
Image courtesy of freedigitalphotos.net by winnond
Joseph T. Zebrowski, Esq. is a passionate, community-involved professional and company liaison who is leading the development of the estate planning and wealth management division of LaBovick Law Group.