What can a Charitable Remainder Trust (CRT) do for you?

February 8, 2016

 Great planning tool for people with highly appreciated assets


A recent Wall Street Journal article by Daniel Grant points out some creative uses of Charitable Remainder Trusts (CRTs) for art and collectible owners.  But they are potentially very useful for all investors.


Charitable Remainder Trusts have been around for a long time.  There are currently over 85,000 trusts in existence with over $75 Billion in assets.


Here's the basics of how they work.  An owner of property (usually highly appreciated property the owner doesn't want to sell and pay income tax on right away) establishes a trust and contributes the property to it.  The trust provides for an income to the donor usually in the amount of about 5-7 percent per year of the fair market value of the property it holds.  The trust continues for the life of the donor (and sometimes others like the spouse of the owner) and upon the death of the last beneficiary the principal is distributed to charity.


The beauty of the CRT is that when it receives the appreciated property and sells it there are no current taxes due on the sale, because it is a charitable entity.


Tax rates on sales of property can range from 15 percent to over 40 percent depending on the type of property and the income tax rate of the state the donor lives in.  The WSJ article pointed out that art and collectibles are taxed at a Federal rate of 28 percent (vs. a max rate of 20 percent for most other types of assets).  When added to the Affordable Care Act supplemental tax of 3.8 percent for incomes over $250,000 and potential state income tax rates of over 10 percent, there are huge current savings available for donors.


Donors don't have to pick the eventual charity at the inception of the trust, and can even choose their own family foundation as the eventual beneficiary.


There are costs to establish and maintain the trusts, but they are usually nominal when compared to the current and ongoing tax savings.  Plus, donors get an immediate charitable income tax deduction based on the present value of the eventual donation to charity. 


CRTs are often a win-win strategy for appreciated assets and family wealth planning.

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