Charitable Remainder Trust
Estate Planning

Selling Real Estate Or A Business? Avoid Capital Gains Tax With A Charitable Remainder Trust

If you have a sale of real estate or assets coming up that will result in you owing capital gains tax, you may want to give us a call to discuss whether to set up a Charitable Remainder Trust (CRT) first. Think of it this way: would you rather pay taxes and send your hard-earned money to the government, or use that same money to provide yourself with a lifetime of income and support your favorite charity at the same time?

CRTs offer a number of benefits to everyone involved. These trusts allow you to contribute to your most beloved charities, while also generating  a valuable extra source of income for the beneficiaries, which can assist with retirement, paying off taxes, or be used for additional estate planning purposes. Such trusts aren’t for everyone, so call us to see if a CRT fits in with your planning goals.

How A CRT Works

A CRT is what’s called a “split-interest” trust, meaning it provides financial benefits to both the charity and the non-charitable beneficiary. The non-charitable beneficiary can be your spouse, child, another heir, or even you.

Here’s how these unique trusts work: when you set up a CRT, you name a trustee, an income beneficiary (or beneficiaries), and a charitable beneficiary. Then, you’ll contribute your appreciated asset to the CRT, and the trustee will sell, manage, and invest the asset(s) to produce income that’s paid to the non-charitable beneficiary.

Normally, the sale of these assets would generate capital gains taxes. But instead, you get a charitable deduction for the donation when you donate the assets to the CRT, and the CRT doesn’t pay capital gains tax upon sale of the appreciated assets. Sounds like a win/win, right?

After sale of the appreciated assets, the cash generated is invested by the trustee, and the non-charitable beneficiary receives income from the trust, which is paid out either annually, semiannually, quarterly, or monthly, depending on how the trust is set up. And if income is not paid out, it can accumulate in the trust and not be subject to income tax, further growing in value. Then, at the end of the non-charitable beneficiary’s life, whatever assets “remain” (hence the name “remainder” trust), pass to the charity or charities named in the trust.

The trustee can be yourself, a charity, another person, or even a third-party entity. Since the trustee (if it’s not you) is not only responsible for seeing that your wishes are properly carried out, but also for managing the trust assets in accordance with complex state and federal laws, it’s vital that the trustee you select has experience with financial management, and ideally, with trust administration.

You can use the following types of assets to fund a charitable remainder trust:

  • Publicly traded securities
  • Some types of closely held stock (Note that CRTs cannot hold S-Corp stock)
  • Real estate
  • Certain other complex assets

If you have assets you think might be useful for funding a CRT, contact us your Personal Family Lawyer® to see if a CRT might be a good fit for your estate planning goals.

Main Types of CRTs

There are two main types of charitable remainder trusts, both of which are based on your options for how the trust income is paid out.

Charitable Remainder Annuity Trusts (CRATS): The beneficiary can receive an annual fixed payment using a Charitable Remainder Annuity Trust. With this option, the income payments from the trust will not change, regardless of the trust’s investment performance. With this type of trust, additional contributions to the trust are not allowed.

Charitable Remainder Unitrust Trusts (CRUTS): With a Charitable Remainder Unitrust, the beneficiary is paid a fixed percentage of the trust’s assets, and the payouts fluctuate depending on the trust’s investment performance and value. Unlike with CRATS, additional contributions can be made with this type of trust.

Tax Benefits Of CRTs

Since CRTs are used primarily to reduce taxes, they come with some significant tax breaks. As mentioned earlier, you can take a partial income tax deduction within the year the trust was created for the value of your donation. The partial tax deduction you receive is based on the trust’s type and term, the projected income payments to the charitable beneficiaries, and interest rates set by the IRS, which are determined based on the growth rate of trust assets.

That said, your deduction is limited to 30% of your adjusted gross income. And if the donation exceeds that limit, you can carry over any excess into subsequent tax returns for up to five years.

Again, profits from appreciated assets sold by the trustee aren’t subject to capital gains taxes while they’re in the trust. Plus, when the trust assets finally pass to the charity, that donation won’t be subject to estate taxes either. Such hefty tax breaks can seriously add up, so if you have the means to set such a trust up, they can be quite beneficial for all parties involved, so if you think such a trust might be right for you, definitely meet with us to discuss your options.

It’s important to note that the beneficiaries will pay income tax on income from the CRT at the time it’s distributed. Whether that tax is capital gains or ordinary income depends on where the income came from—distributions of principal are tax free.

Don’t Go It Alone

CRTs come with very specific and complex requirements surrounding their creation, operation, and the responsibilities of the trustee, so if you are considering setting up a CRT, it’s vital that you consult with a lawyer experienced with such trusts. To this end, if you have highly appreciated assets you’d like to sell while minimizing tax impact, maximizing income, and benefiting charity, call us so we can determine the best way to achieve your charitable objectives, while maximizing your tax-saving and other financial benefits. Contact us today to learn more.

This article is a service of a Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

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Charitable Remainder Trust
Estate Planning

3 Ways To Benefit By Incorporating Charitable Giving Into Your Estate Plan

You are likely well aware of the tax benefits that come from donating to charity during your lifetime—donations to charity are tax-deductible. But you may be surprised to learn about the numerous benefits that are available when you incorporate charitable giving into your estate plan.

As with donating to charity during your lifetime, dedicating a portion of your estate to a charitable cause can reduce the taxable value of your estate. You can also receive significant tax savings by naming your favorite charity as the beneficiary of your IRA, 401(k), or other retirement accounts.

And if you have highly appreciated assets like stock and real estate that you want to sell, you can even set up a special type of charitable trust that can not only help you avoid both income and estate taxes but also create a lifetime income stream for yourself and your family, all while supporting your most beloved charitable cause.

While as a Personal Family Lawyer®, we can help you find the most beneficial option for donating to charity via estate planning, here are three of the most popular ways to structure charitable giving into your plan.

1. Leave Money To Charity In Your Will Or Revocable Living Trust

One of the simplest ways to donate to charity in your estate plan is to name a charity as the beneficiary in either your will or revocable living trust. Just make certain when you leave money via your will or living trust that you use the correct legal name of the charity, as many charities have very similar names, and if you aren’t specific, the charity may have difficulty accessing the funds.

In either your will or living trust, you can also state the purpose for which you’d like the charity to use the funds, or you can make the donation for the charity's “general purpose,” meaning the charity can use the funds as it sees fit. If you choose to leave money for a specific purpose, make sure that the charity can actually fulfill that purpose or the charity might have to refuse the gift. To this end, if your request is really specific, you may want to contact the charity before making the request to see if the organization will be able to fulfill your objective.

Keep in mind that if you leave money to charity in your will, your will must first go through the court process of probate, which can be time-consuming, before the organization can access the funds following your passing. Conversely, donations to charity made via a trust would pass to the charity immediately upon your death.

Leaving money to charity in your will or living trust can reduce the taxable value of your estate, thus reducing estate taxes for your heirs. That said, the current federal estate tax exemption is $11.7 million per person, so unless you are super wealthy, you won’t see any tax benefit—at least at the federal level. However, 17 states currently have state estate taxes that kick in at lower exemption amounts, so if you live in one of those states and leave money to charity via your estate plan, your loved ones may be able to benefit from reduced estate taxes at the state level.

2. Name A Charity as the Beneficiary of Your Retirement Account

As with leaving money to charity via your will or living trust, another easy way to incorporate charitable giving into your estate plan is to name a charity as the beneficiary of all or a percentage of your tax-deferred retirement accounts (IRA, 401(k), 403(b), etc.). In addition to supporting a good cause that’s near and dear to your heart, donating your retirement account assets to charity comes with some significant tax-saving benefits.

Individuals named as beneficiaries of your retirement account will have to pay income taxes on any distributions they receive from your retirement account. But since charities are tax-exempt, charitable organizations named as beneficiaries will receive the full amount of your retirement account assets. Additionally, though you need to include the value of the retirement account assets as part of the gross value of your estate, you will receive a tax deduction for the charitable contribution, which can offset estate taxes.

Finally, under recent changes to the SECURE Act, most beneficiaries of IRAs now must withdraw all funds from the retirement account within 10 years of the account holder’s death, which eliminates the ability of most individual beneficiaries to stretch out retirement account distributions over time and compresses income tax payments into a much shorter period. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.

Yet because charities don't pay income taxes, it may be more beneficial from a tax-saving perspective to leave your retirement assets to charity, while passing on your non-retirement assets to your loved ones. However, the SECURE ACT does offer exemptions to the mandatory 10-year withdrawal rule for certain beneficiaries, including a spouse, minor children, and disabled or chronically ill individuals. Given this, you should consult with us, as your Personal Family Lawyer, to determine the most beneficial option for passing on your retirement account assets.

3. Set Up a Charitable Remainder Trust

One final way to structure charitable giving into your estate plan is by creating a special trust known as a charitable remainder trust (CRT). If you have highly appreciated assets like stock and real estate you wish to sell, you can use a CRT to avoid income and estate taxes—all while creating a lifetime income stream for yourself or your family and supporting your favorite charity.

A CRT is a “split-interest” trust, meaning it provides financial benefits to both the charity and a non-charitable beneficiary. With CRTs, the non-charitable beneficiary—you, your child, spouse, or another heir—receives annual income from the trust, and whatever assets “remain” at the end of your lifetime (or a fixed period up to 20 years), pass to the named charity or charities.

When you set up a CRT, you name a trustee, an income beneficiary, and a charitable beneficiary. The trustee will sell, manage, and invest the trust’s assets to produce income that’s paid to you or another beneficiary. The trustee can be yourself, a charity, another person, or a third-party entity.

With the CRT set up, you transfer your appreciated assets into the trust, and the trustee sells it. Normally, this would generate capital gains taxes, but instead, you get a charitable deduction for the donation and face no capital gains when the assets are sold. Once the appreciated assets are sold, the proceeds (which haven’t been taxed) are invested to produce income.

As long as it remains in the trust, the income isn’t subject to taxes, so you’re earning even more on pre-tax dollars. And when the trust assets finally pass to the charity, that donation won’t be subject to estate or income taxes.

Because CRTs come with very specific and complex requirements surrounding their creation, operation, and the responsibilities of the trustee, it’s vital that you consult with us, your Personal Family Lawyer® if you are considering setting up a CRT. Meanwhile, review our previous post for an in-depth look at how charitable remainder trusts work and the numerous tax-saving and income benefits they offer.

Enlist Our Support

Although these three methods for structuring charitable donations into your estate plan are among the most popular, there may be other options available. Meet with us, as your Personal Family Lawyer®, to determine the best way to achieve your charitable objectives while maximizing your tax-saving and other financial benefits. Schedule an appointment with us today to learn more.

This article is a service of Pantea Fozouni, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

Read More