Can a Charitable Trust Benefit Me?
If you have charitable inclinations to benefit a charity when you pass away, but you want to retain the use and benefit of your assets during your life, a charitable remainder trust (“CRT”) may be the perfect tool for you. You can receive a current income tax deduction and increased income during your life (on a sale of appreciated property) and your assets will benefit charity when you pass away. A true win/win.
What is a CRT?
A CRT is an irrevocable trust which you can create now. You can transfer a portion of your assets to the trust which will be held for your benefit during your life (or the lives of you and your spouse) with the remainder passing to a charity or charities of your choice after your death.
How Does a CRT Work?
You can be the trustee of your CRT. You do not lose control of your assets and can invest trust assets in financial instruments or securities of your choice. You receive income throughout your life (or throughout the lives of you and your spouse). Upon your demise, the remaining assets pass to one or more charities you designate.
The most common type of CRT is a charitable remainder unitrust (“CRUT”). In a CRUT, you select a percentage such as 5% or 6%, which will be paid to you as long as you live. As the value of the trust assets increases or decreases, your payouts adjust proportionately.
What are the Advantages of a CRT?
A CRT will (1) give you a current income tax deduction; (2) let you sell appreciated property without paying any capital gains tax; (3) provide you with an income stream throughout your life; (4) protect your asset from any creditors; and (5) avoid estate taxes.
Income Tax Deduction
You receive an income tax deduction in the year you contribute assets to the trust based on the fair market value of the assets contributed. Your tax deduction by law must be at least 10% of the value of the assets contributed to the trust.
Avoidance of Capital Gains Tax
A common use of a CRT is to avoid paying capital gains tax on appreciated assets you may choose to sell at some future time. When you contribute appreciated property and later sell it, 100% of the proceeds remain in the trust for your benefit throughout your life. No capital gains taxes are owing.
Because no taxes are paid, all of the proceeds can be reinvested to generate larger payments for you. For example, if you own property or securities worth $500,000 which has a tax basis of $100,000, you would pay $80,000 in capital gains tax (at a 20% rate) when you sell the property. If you invest the remaining $420,000 at 5%, you would receive a $21,000 annual return.
Instead, if you create a CRT and contribute the property, you would receive no less than a $50,000 current income tax deduction. If you later sell the property, no capital gains tax would be paid. The annual return on the $500,000 of proceeds at 5% would be $25,000 per year, or $4,000 per year more than your return outside of a CRT. Additionally, no future creditor could attach the $500,000 held in the CRT, whereas the $420,000 in the prior example would be fully exposed to such claims.
The bottom line in this example is that by using a CRT you receive: (1) no less than a $50,000 current income tax deduction in the year that you create the trust and transfer the property into it; (2) you do not pay any capital gains when you sell the property; (3) you generate $4,000 of extra income for you throughout your life; and (4) you benefit charity.
If you have charitable inclinations but want to retain the use of and income from your property during your life, a CRT may be perfect for you. You receive greater tax benefits and income throughout your life. Then, when you pass away, charities are benefited. You will have done something good for yourself and good for the community.
Robert L. Bolick is an estate planning and asset protection attorney in the Firm’s Las Vegas office. Mr. Bolick frequently presents about estate planning and asset protection throughout Las Vegas.