Benefits of a Charitable Remainder Trust – Capital Gains Tax Deferral

The Charitable Remainder Trust is one of the most common tax planning techniques we use with clients here at Ainer & Fraker, LLP.

Let’s look at one of the most compelling benefits of a Charitable Remainder Trust: deferral of Capital Gains Tax on appreciated amounts contributed to the CRT.

The power of deferred capital gains is the most compelling benefit of a Charitable Remainder Trust.  It is so powerful, it almost never makes sense to contribute an asset to a Charitable Remainder Trust unless there are built in capital gains.

A couple of notes:

1)   Once appreciate property is contributed to the Charitable Remainder Trust, it can be sold and the capital gains tax can be deferred until the income stream leaves the CRT and goes to the Donor

2)   Once the Income stream leaves the CRT and goes to the Donor, then the Income is taxed on a Worst In, First Out (WIFO) basis

3)   Due to the IRS’ Step-Transaction Doctrine, the deferral of Capital Gains Tax is not available if there is a binding commitment to sell the asset prior to its contribution to the Charitable Remainder Trust

Timing is one of the most critical elements in the tax planning involving a Charitable Remainder Trust.

Therefore, you should never consider using this technique without using qualified legal counsel.