Giving appreciated property to a charitable remainder trust (“CRT”) instead of selling an asset can be a win-win for those with charitable intentions. This tax advantaged technique may allow an individual that might otherwise pay tax on the sale of appreciated property to instead give the property to charity, enjoy a charitable deduction and retain some income stream, typically for life. If this interests you, please read on for answers to some key charitable remainder trust questions we posed to Douglas F. McRae, a charitable trust accounting and administration expert with over 30 years’ experience in the charitable arena.
Doug, tell us more about what a CRT is specifically?
A Charitable Remainder Trust is an irrevocable legal trust instrument created under the authority of the Internal Revenue Service Code Section 664. This irrevocable trust has two primary purposes:
(1) to distribute a fixed percentage of its assets to a non-charitable beneficiary, and (2) at the expiration of a specified time (a date certain or the death of the non-charitable beneficiary) the remaining balance is distributed to an IRS qualified charity.
There are two primary types of CRTs; a Charitable Remainder Unitrust (CRUT) and a Charitable Remainder Annuity Trust (CRAT). They differ principally as it relates to the distribution of income to the non-charitable beneficiary. In a CRUT, the income distributed for the coming year is calculated at the end of each calendar year and changes as the value of the trust increases or decreases. In a CRAT, the distribution is a percentage of the initial funding value and does not change in future years.
Who are typical candidates for gifting to a CRT?
Very simply, those with appreciated assets desiring to increase their income who are also charitably inclined. Some factors suggesting possible advantages to funding a CRT include being over age 60, no children, desire to defer capital gains taxation, and a need to diversify assets. Also, a high income individual who has maxed out their qualified plans but wants to put more away for future income on a tax deferred basis.
The best candidate for a CRT is typically a business owner with a C-corp looking to retire soon or possibly getting bought out. Another great candidate for a CRT is an owner of real estate who is thinking of selling but does not want to pay the capital gains tax, or is tired of the 1031 exchange treadmill and wants to get cash out of the property in a tax efficient manner.
What are the key benefits of a CRT?
Primary benefits include receiving a charitable income tax deduction (phase-out rules may apply), deferral of capital gains taxation, receiving an increased income on the asset gifted to the CRT, and a desire to support a favorite charity or charities.
Let’s say Bob and Betty (age 70 and 68) have an appreciated parcel of land worth $250,000 they’re considering selling or gifting to a CRT to benefit their college. Can you run through the benefits they’d expect to receive in terms of tax savings and income over their lifetime, assuming they want a 6.5% return for life?
Upon creating and funding a Charitable Remainder Unitrust, Bob and Betty will first bypass a capital gain of $225,000, which would save them $53,500. They receive an income tax deduction of $75,688, which at the 40% federal income tax bracket would save them $30,275. State income tax would increase this tax savings benefit. Their annual income would be $16,250 and over their joint life expectancy of 22.7 years, they would receive a total of $368,875. If the trust were to earn income and some capital appreciation over two decades covering the income distributed to Bob and Betty and investment management and accounting and administration fees, it is possible that the funding value of $250,000 could very well be distributed to their named charity.
What does it take in terms of time and financial costs to create and maintain the CRT for life?
The time it takes to create the trust depends on how efficiently the attorney and client work together. The one-time cost can be $3,000-8,000 depending on the complexity of the trust. There will be annual investment management costs and custody costs which might approximate 1-1.5%. Annual trust accounting and administration costs to maintain accurate records for a relatively complex four-tier payout system, valuations, preparation of an annual report, annual tax return preparation and filing might cost approximately 0.5% depending on the trust value. Trust accounting and administration fees are negotiated based on the number of trusts and aggregate values.
Are the contributions to the CRT revocable or irrevocable?
The assets are irrevocably transferred to the CRT. The IRS will allow the avoidance of capital gains tax and a current income tax deduction only if there is an irrevocable guarantee that sometime in the future a gift will be received by a qualified charity. It is possible to change the charitable beneficiaries, but the trust cannot be revoked other than in very limited situations.
So if someone thinks they might want to gift to a CRT but they aren’t sure if it makes sense, what do you advise?
Our advice would be to contact Beacon Pointe Advisors to be referred to a professional gift planner who will discuss their needs and objectives and prepare a specific illustration showing the benefits upon which to make a decision about whether creating a CRT fulfills their objectives.
Can I transfer part of a particular asset into a CRT?
Yes, the Charitable Remainder Unitrust is an “open box.” You can choose to fund only a part of your appreciated assets into the CRUT. At a later time you may fund additional assets into the CRUT. This will add to your income and give you a new charitable income tax deduction. However, this is not the case with the Charitable Annuity Trust (CRAT), which does not allow future asset additions. If one likes the CRAT construct they can create another CRAT.
Thank you, Doug. We invite our readers to ask their Beacon Pointe advisors to put them in contact with you to find out if a CRT might maximize the benefits of the sale of an asset for themselves and a beloved charity.
Disclaimer: Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites. This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Beacon Pointe Advisors does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.