CHARITABLE REMAINDER TRUST (CRT) 

A Charitable Remainder Trust, or CRT, lets you convert a highly appreciated asset like a business, stock or real estate into a sizable lifetime income stream while paying no capital gains and receiving an immediate charitable income tax deduction. It also lets you help one or more charities of your choosing creating a win, win, win situation.

A CRT is an irrevocable trust. This removes the asset from your estate so no estate taxes will be due when you pass away.  It is important to not have a pre-arrangement (letter of intent) to sell the assets at the time they are transferred to the CRT because the Internal Revenue Service could apply the “step transaction doctrine” and disregard the transfer to the CRT. 

 

The process to utilize a CRT strategy is as follows:

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  1. Transfer the appreciated asset into the CRT, receive immediate tax deduction 

  2. The Trustee sells the asset at full market value, paying no capital gains tax

  3. Reinvest the proceeds into a diversified portfolio

  4. You (your spouse, and/or family member) receive a lifetime income stream from the trust

  5. When you die, the remaining trust assets go the charities you have selected

Example Of Asset Sale
No CRT vs. CRT

 

Jane and Jon (ages 63 and 65) are selling their business (or stock, real estate, etc) for $4,000,000. Their cost basis is $500,000. They would like to sell the business and generate some retirement income from the asset. They also want to reduce the amount of taxes they pay and would feel good about leaving some money to charity.

Selling The Business, No CRT

  • They would have a gain of $3,500,000 (current value less cost) and would have to pay $700,000 in federal capital gains tax (20 percent capital gains rate applied to the $3,500,000 gain). This would leave them with $3,300,000

  • If they reinvest and earn a 5% return, that would provide them with $165,000 in annual income. Over their life expectancy of 26 years they would receive a total lifetime income of $4,290,000

  • They still own the assets, there is no protection from creditors, and no charitable income tax deduction is available

 

Utilizing The CRT

  • Transfer the business into the CRT and receive an immediate charitable income tax deduction of approximately $1,280,000

  • In the 37% tax bracket, this will reduce their current federal income taxes by $473,600

  • The business would be sold inside of the CRT but because the trust is exempt from capital gains tax, the full $4,000,000 is available to reinvest

  • The same 5% return will produce $200,000 in annual income. Over their life expectancy of 26 years they would receive a total lifetime income of $5,200,000. That is $910,000 more in income than if they had sold the business outside the CRT

  • The assets are in an irrevocable trust, they are protected from creditors and outside of their estate

This is a hypothetical example used for illustrative purposes only and is not representative of any specific investment. Your results may vary.

 

 

What about my children? Do they get anything?

Yes, there is an easy way to leverage this strategy even further and provide a lump sum benefit to your children in the form of an inheritance. This is accomplished by using the income tax savings and a portion of the income you receive from the CRT to fund an irrevocable life insurance trust (ILIT). See flow chart below.

CRT FLow Chart.jpg
How Much Is The Income Tax Deduction?

The income tax deduction is usually limited to 30 percent of adjusted gross income, but it can vary from 20 percent to 60 percent, depending on how the IRS defines the charity and the type of asset. If you cannot use the full deduction the first year, you can carry it forward for up to five additional years. 

Benefits of Using a CRT

  1. Convert an appreciated asset into lifetime income

  2. Reduce your current income taxes with charitable income tax deduction

  3. Pay no capital gains tax when the asset is sold

  4. Reduce or eliminate your estate taxes

  5. Gain protection from creditors for the gifted asset

  6. Benefit one or more charities of your choosing 

  7. Receive more income over your lifetime than if you had sold the asset yourself

  8. Leave more to your children or others by using a life insurance trust to replace the gifted asset

Some Potential Disadvantages

  1. CRTs are irrevocable: terms of the trust are generally unchangeable 

  2. Donating assets to charity means fewer resources and assets for your partner, spouse, parents, and/or other heirs

  3. You will no longer have control of the funds once they have been placed into such a trust

  4. Any income that you receive from your charitable trust could reduce the total contribution that you end up leaving to your charity

  5. You may risk leaving nothing to your charity if you plan to receive high payments from the trust while you’re alive

Seek Professional Assistance
If you think a Chartiable Remainder Trust could be of value please contact us to discuss your situation 203-557-0291 or Derek@newpointewealth.com 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LIFE AND LONG-TERM CARE INSURANCE

Needing long-term care puts an enormous emotional and physical strain on your loved ones and family members. By planning ahead of time, you can help manage this burden. Also, as you age, your health may change, which could make it difficult to get coverage in the future. This is why it’s important to start planning now while you have the most options.