The Charitable
Remainder Trust
I haven't really emphasized the
charitable remainder trust yet, but it is an income
generating option. Part of the reason I haven't
emphasized CRTs yet is because not many people want
to do them. Your average person looking to use a
trust for estate or financial planning purposes just
doesn't have enough assets to leave a legacy to
their children and a worthwhile gift to charity. (By
worthwhile, I mean worth setting up and maintaining
a trust to administer the gift specifically.) When
choosing between the two, most people opt to leave a
gift to their children or other heirs over charity,
especially now that virtually all but the largest
estates escape estate tax.
If you're wondering why I'm
talking about legacies and estate tax so much, let
me back up. Though I show my clients how they can
use the charitable remainder trust to generate a
stream of income, it is much more commonly employed
in estate planning. Though there are many different
types of CRTs, the basic one generates income from
the asset you place into it - which it pays to you
during your life - and then it distributes the asset
to the charity of your choice on your death. The CRT
is a way to give money to charity on your death, but
remove it from your estate during your life thereby
reducing estate taxes, and still get some income
benefit from the gifted asset.
For income generating purposes,
you can already see how the trust generates income,
but there's a twist. Charitable remainder trusts are
tax exempt, so highly appreciated assets can be sold
through them without incurring any capital gains
tax. This means that more of the proceeds of the
sale can be reinvested to generate a larger income
stream for you. (In contrast to the PAT, with the
CRT, you need not have a fixed, contractual stream
of payments. Payments are often a function of the
amount of principal accruing in the trust, so if the
value of the principal grows, so does your income.)
Also, remember that you have gifted the asset to the
trust, so when it makes payments to you, those are
not payments for its purchase of the asset for which
you must pay capital gains tax. You are just
receiving income for which you will have to pay
income tax. However, you do get an immediate income
tax deduction for the gift of the asset to the CRT,
so that will help offset your income tax burden.
Despite the benefits of CRTs, I
don't often recommend them to my clients. They are
subject to a lot of scrutiny and regulation due to
their tax exempt status. Mostly, though, the problem
is the above-mentioned issue of having to choose
between charity and heirs. Often, if the person
setting up the trust is healthy enough, a life
insurance policy will be purchased to replace the
funds the heirs would have received. Policy premiums
are just a financial drain on the eventual estate,
and they can be quite large if you are purchasing
the policy later in life. As well, you do lose
control of your asset when you set up a CRT.
A CRT can work quite well for you if you're
particularly charitable or have a large illiquid
asset that your family will have a difficult time
selling anyhow (for instance, through a CRT, the
personal papers and writings of an author can be
left to the university at which he taught, while the
equally or maybe more valuable intellectual property
rights to his published works can be left to his
family). If you think this might be an option for
you, feel free to call me at 760-917-0858 for a
no-cost consultation.
Paula Straub
Save Gains Tax
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