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A gift of appreciated assets to a charitable remainder trust (CRT) can help you avoid capital gains tax on the appreciated assets, create immediate income-tax deductions, increase the income stream for you and your family from the assets invested in the trust and ultimately benefit your favorite charity.Now that we're talking about CRTs, I want to make sure we cover the following topics...
- What Charitable Remainder Trusts Do
- How a Charitable Remainder Trust Can Benefit You
- How a Charitable Remainder Trust Works
WHAT CHARITABLE REMAINDER TRUSTS DO
A CRT allows you to transfer certain assets into the trust for the present benefit of a non-charitable income recipient, leaving the remainder as a gift to a charity.
HOW A CHARITABLE REMAINDER TRUST CAN BENEFIT YOU
- Provides tax benefits. CRTs provide for a current income tax deduction for Federal and, generally, state income tax purposes.
- Avoids capital gains taxes. A CRT permits the sale of appreciated assets by the trust without Federal income tax on the gain. State and local taxes may also be avoided. This leaves more money to be reinvested and, ultimately, a longer income stream to the income beneficiaries (either you or your designated beneficiaries).
- Achieves tax-free accumulation of earnings. Income from CRTs is taxable only to the extent it is distributed to the income beneficiaries. Undistributed capital gains or earnings in the trust accumulate tax-free.
- Provides tax-favored spendable income. The avoidance of capital gains allows the trustee to reinvest the entire principal amount.
- Allows for diversification of investments. A CRT that sells the assets avoids immediate capital gains taxes. The proceeds from the sale can be reinvested in a more diversified or higher-yielding income-producing investment portfolio.
HOW A CHARITABLE REMAINDER TRUST WORKS
When you gift the assets to the trust, you receive an immediate income-tax deduction and the assets are removed from your taxable estate. When the trustee sells the appreciated assets at full market value, no capital gains tax is paid by the trust and the full value of the assets is reinvested to provide you with a right to receive the taxable income for life.
CRTs are structured in one of two ways:
- The CRT Annuity Trust. This trust pays the income beneficiary an annual fixed dollar amount equal to a percentage (not less than five percent), selected by you, of the initial value of the assets transferred into the trust.
- The CRT Unitrust. This trust pays a fixed percentage (not less than five percent) of the fair market value of the trust's assets as determined annually. Many people prefer some protection against inflation, however, and therefore choose to establish a CRT unitrust.