Benefits of the Charitable Remainder Trust – Estate Tax Elimination

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: the Estate Tax credit for amounts passing to Charity.

While it seems obvious at first – assets passing to Charity are exempt from your Estate for Estate Tax purposes – there are some truly outstanding aspects to this benefit which makes Charitable Remainder Trusts so popular.

The Uncertainty around the Federal Estate Tax is one of the most challenging aspects for both clients and their attorneys to deal with.

Rising and falling Estate Tax credits, rising and falling Gift Tax credits, clawback provisions, portability and a myriad of other issues make planning with certainty extremely difficult today.

This is why a Charitable Remainder Trust is such a powerful planning tool – it allows your family to continue to enjoy the current income stream of an asset during your life (or the lives of others) with the certainty that the asset has been totally removed from your Estate for Estate Tax purposes.

Other Estate Tax planning techniques fail to provide the same level of certainty.  Some fail to work properly if you live too long, some fail if you die too soon.   Some only succeed at removing a portion of the value of the asset from your Estate.  And some are under the constant scrutiny and attack of the Internal Revenue Service and Congress.

By contrast, the Charitable Remainder Trust remains an elegant, and relatively straightforward means of “having your cake and eating it too” – i.e. enjoying the use of the asset during your life, yet knowing it will not be taxed at your death.

As always, you should seek the advice of qualified legal counsel to assist you when considering this or other tax planning techniques.

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.

Benefits of a Charitable Remainder Trust – Income Tax Deduction

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: the Income Tax Deduction for amounts passing to Charity.

Although much of the discussion around Charitable Remainder Trusts focuses on the Capital Gains Tax benefit and the Estate Tax benefit, people often overlook the fact that you can get a substantial Income Tax deduction for the amounts passing to Charity.

A couple of key points on the Income Tax deduction:

1)   Because the Charitable Remainder Trust is Irrevocable, the deduction is available to the Grantor (the client) immediately upon donation, even though the amounts may not go to Charity for a long time

2)   At the time of the donation, the Donor is entitled to a current Charitable Deduction equal to the Net present-value of the Future Remainder Interest

3)   The law requires that the present-value of the Remainder Interest be no less than ten (10%) percent of the fair market value of the trust assets, as determined on the date the assets are transferred to the trust

These are the basic Income Tax benefits available to those who contribute to a Charitable Remainder Trust.

One additional rule is worth mentioning:

How much of the Deduction you are eligible to take depends on whether the Remainder Beneficiary (the Charity) is a Private Foundation or a Donor Advised Fund or other Publicly Supported Charity.

While you can name your Private Foundation as the Remainder Beneficiary, and thus keep it within the direction of your family, it may not always be financially advantageous to do so.

Here’s why:

As a general rule, you can deduct up to 50% of your Adjusted Gross Income (AGI) for cash gifts to a Publicly Supported Charity.  That drops to 30% of AGI for cash gifts to a Private Foundation.

For gifts of Appreciated Property (not cash), you can deduct up to 30% of your Adjusted Gross Income (AGI) if the beneficiary is a Publicly Supported Charity.  That drops to 20% of AGI if the beneficiary is a Private Foundation.

In addition, the value of the contribution to a Private Foundation is limited to the cost basis of the asset, not the fair market value – a substantial detriment.

One solution:  Set up a Donor Advised Fund (DAF) at your local community foundation in your family’s name, and name it as the beneficiary of the CRT.

A Donor Advised Fund has all the tax benefits of a Publicly Supported Charity, but you can direct the money to your preferred charities over time (much like a Private Foundation).