Many high-net-worth households own appreciated assets that comprise a substantial percentage of their wealth. Oftentimes, capital-gains taxes create a disincentive for selling the assets. The tax consequences can be of particular concern when the owners rely on the appreciated assets to provide incoming cash flow.
At the same time, many of these high-net-worth households have philanthropic intentions and have planned charitable gifts upon their death not only to give back to their communities, but also to reduce their taxable estate.
For those with appreciated assets and charitable aspirations, there is another option to consider – a charitable remainder trust (CRT). A CRT enables donors to gift appreciated assets to charity and, in return, receive income throughout the rest of their lifetime.
CRT Mechanics
Appreciated assets are first transferred into a newly created trust. After the trust has been funded, the assets can be liquidated without capital-gains tax consequences.
The trustee (usually the donor) has a choice of receiving income from the CRT either as 1) a fixed annuity stream (known as a charitable remainder annuity trust, or CRAT), or 2) a fixed percentage of the trust value in each successive year (referred to as a charitable remainder unitrust, or CRUT). If the donor chooses to implement a CRAT, additional assets cannot be added to the trust once it has been funded. Donors can add additional assets to a CRUT, however.
The donor is eligible to receive a tax deduction equal to the value of gifted assets less the present value of the projected payouts (based on the donor’s life expectancy). The donor is, however, subject to income taxes on the CRT’s annual payouts. The income-tax rate depends on the types of investable assets held within the trust.
Once the donor dies, the charitable beneficiary (or beneficiaries) keeps the remaining trust assets.
Ideal CRT Candidates
Jim McCallum, CFO of the $115 million Sacramento Region Community Foundation, has said that the best CRT candidates are those with philanthropic intentions who hold highly appreciated, non-encumbered (i.e., no debt associated with the asset), non-income-producing assets. Those with substantial land holdings and those with highly appreciated stock often fall into this category. “Your asset is sold and pays you income for the rest of your life. Plus, your tax-deductible gift benefits the charities of your choice after your death. You can’t beat that!” McCallum said.
McCallum recommends CRTs only for those wishing to gift more than $250,000. Given the costs of establishing the CRT and the associated annual reporting requirements, CRTs make more economic sense with larger donations.
Creating a CRT
While some larger charities have in-house, planned-giving resources who can assist with forming CRTs, those interested in establishing a CRT should first consult with an estate attorney who has charitable-trust experience. Although a charitable beneficiary (or beneficiaries) must be identified before the trust is established, a donor can choose to later change beneficiaries even though the trust itself is irrevocable.
Many believe that it is better to give than to receive. With a CRT, high-net-worth donors can reap the benefits of doing both.
