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TAX INCENTIVES & OTHER BENEFITS OF A CHARITABLE REMAINDER TRUST

Posted: February 09, 2018

If you wish to offer a significant gift to charity, you may want to consider a charitable trust. Since 1969, countless families have used charitable remainder trusts (CRTs) to increase their incomes, save taxes and benefit charities.

A CRT allows you to convert a highly appreciated asset, such as a stock or real estate, into a lifetime income. It essentially reduces your taxes now and estate taxes when you pass away. Additionally, you pay no capital gain tax when the asset is sold and lets you help one or more charities that have special meaning to you.

In order to set up a CRT, you need to initially establish a trust and transfer to that trust all the property that you wish to donate to charity. The charity you select must be approved by the Internal Revenue Service (IRS), which typically means that the charity must be exempt from taxes.

The charity will act as the trustee of the CRT and will be charged with the duty of investing, protecting, and managing the trust funds. The charity will pay you, or a beneficiary, a portion of the income that the trust funds accumulate. These payments are set to last for a finite number of years, or for the rest of your life, depending on details of the documents. At the time of your death, the trust will end and the property that you donated will go to the charity.

The following are the common tax advantages of a charitable trust:

  • Income tax – For the value of your gift to charity, you are allowed to take an income tax deduction and disperse it over a period of five years. However, determining the amount of your deduction is tricky. The value of your gift is not simply the value of the property since the IRS deducts from that value the amount of income you’re likely to receive from the property. For example, if you gave $200,000 but are expecting to get back $75,000 in interest over the course of your life, your total deduction would have to be $125,000.
  • Estate tax – when the trust property eventually goes to the charity outright, it is no longer in your estate, which means it isn’t subject to federal estate tax.
  • Capital gains tax – With a CRT, appreciated property can become cash without having to pay capital gains tax on the profit. Since charities don’t’ have to pay capital gains tax—unlike people—the proceeds stay in the trust and are not taxed if the charity sells it.

However, if you do not think that the time is right for you to make such a large donation, then it isn’t time for you to consider a charitable trust, either. These trusts are irrevocable, meaning you cannot take back what you have already given once you start the trust.

If you are interested in setting up a CRT for your estate, schedule a consultation with our Springfield, MO estate planning lawyersat Worsham Law Firm today.

Categories: Estate Planning