As we all become wrapped up in the holiday season, we often hear and think about those who are less fortunate, and how we can do something to help. It’s also the time of year that many of us think about making year-end charitable donations to offset our tax bills. While there are many ways to give to charities, a Charitable Remainder Trust (CRT) is an excellent way to donate generously to charity, while maximizing the personal, financial, and tax benefits of your gifts.

Through the use of a Charitable Remainder Trust, it may be possible to receive a charitable deduction for your gift to your favorite charity, while providing a lifetime stream of income. You can also avoid paying capital gains taxes on the sale or disposition of appreciated securities or other property with effective CRT Planning. In addition, a CRT can play an important role in your estate by reducing your potential estate tax liability.

How does it work?

The way a CRT works is pretty simple. Once the trust is written by a qualified attorney, highly appreciated assets are moved into the trust, avoiding capital gains, and providing you, the donor, with an income tax deduction which can be spread out over five years. You are able to name a beneficiary to receive a yearly income stream from the Charitable Trust, and upon your death, the remainder of the Charitable Trust will go to the specified Charities. Since the assets were transferred out of your estate, the charitable trust may also reduce your estate tax liability. One drawback of a CRT is that it isn’t designed to leave any of the remainder interest to children. This can be remedied by electing to take distributions from the trust, and using them to fund a separate life insurance policy for the benefit of your children.

Let’s look at an example:

Dr. and Mrs. Jones are 65 and 60 years old, with an estate valued at $13 Million, including $3 Million of highly appreciated assets. They are living comfortably off of pension, IRA’s and rental income, and would like to maximize the value of the appreciated assets as a legacy to their children and their favorite charities. The Illustration below will demonstrate how this works.

By setting up a CRT and gifting $3 Million to the trust, we were able to provide Dr. and Mrs. Jones with an income tax deduction of up to a 50% of their AGI spread over 5 years. The gift to the CRT will also reduce the size of their estate to below the Unified Credit, eliminating estate taxes. Next, by electing to take a 5% payout ($150k/year) from the CRT, and gifting it to a separate children’s trust, they can purchase a $9.0 Million life insurance policy for the benefit of their children. At their death, Dr. and Mrs. Jones will have $0 Estate tax liability, and will have provided their favorite charities with a $3.0 Million gift. Their children will receive a $9.0 Million tax-free insurance policy, in addition to their $10.0 Million estate.

How can we help you?

Wealth Planning Network can help you design and implement a CRT strategy as a part of your estate plan that rewards your favorite charities, reduces income and estate taxes, and provides a legacy for your loved ones. This example is for educational purposes only, and is not to be considered for specific legal advice. You should always consult with a qualified advisor, CPA, and attorney regarding your individual circumstances.