Donating to causes you believe in can bring great satisfaction. There is a long tradition of charitable giving in this country, and it enjoys favorable tax treatment. If you want to leave significant sums to charity, while reducing the taxes your estate will pay upon your death, a charitable trust is a good tool to consider.
Charitable Remainder Trusts
There are several types of charitable trusts that allow individuals to make charitable gifts and receive the tax benefits associated with charitable gifting, while simultaneously creating an income stream for themselves or for designated beneficiaries. These types of trusts are known as Charitable Remainder Trusts – commonly referred to as “CRT’s”. A CRT is a trust that provides for a specified distribution to one or more beneficiaries, at least one of which is not a charity, for life or for a term of years (not to exceed 20 years), with an irrevocable remainder interest paid to charity. [Treas. Reg. §1.664-1(a)(1)(i)]. Some of the CRT variants are Charitable Remainder Unitrusts (“CRUT’s”), Charitable Remainder Annuity Trusts (“CRAT’s”), Net-income Method Charitable Remainder Unitrusts (“NI-CRUT’s”), and Net-income with Make-up Charitable Remainder Unitrusts (“NIM-CRUT’s”).
Using a properly established charitable remainder trust allows you (or another designated beneficiary) to receive current income from appreciated assets (such as stocks or real estate) without incurring capital gains taxes, and receive an income tax deduction for the present value of the gift. One of the major benefits of using CRT’s is the elimination of capital gains taxes on highly appreciated assets. Let’s look at a hypothetical to see how this could work. Greg creates a CRT and funds it by transferring an apartment complex he purchased 40 years ago into the trust. The complex has a basis of $500,000, but is now worth $5M. If the property were sold outright during Greg’s lifetime, he would incur capital gains tax on $4,500,000. However, if Greg transfers the complex to a CRT – let’s use a CRAT for purposes of this hypothetical – Greg can avoid the assessment of capital gains taxes. Because we’re using a CRAT – a Charitable Remainder Annuity Trust – Greg can receive fixed income of at least 5% ($250,000/year) from the trust for his lifetime. This creates a relatively secure income stream for Greg during his lifetime, eliminates capital gains taxes, and – of course – leaves a valuable asset to a charity Greg supports.
As a side note, the lifetime gift of the value of the gift – $5M – will be counted against Greg’s overall estate tax exemption, but Greg’s estate will avoid exposure to further appreciation of the asset, so if the asset is valued at $7.5M at the time of Greg’s death, the gift value for estate tax purposes remains $5M.
Charitable Lead Trusts
Another type of charitable trust is the charitable lead trust. In many ways, charitable lead trusts are the reverse of charitable remainder trusts. With charitable lead trusts, the charitable giving “leads” the trust, and the remainder interest passes to non-charitable beneficiaries.