For high net worth individuals and couples that are “asset rich but cash poor”, establishing a Charitable Remainder Trust (CRT) with appreciated investments can be an ideal solution to increasing retirement income. Meeting the requirements for such trusts, as delineated in the tax code, can result in turning a highly appreciated asset that produces little or no income into a source of lifetime income that also carries an income tax deduction.
An individual or couple can irrevocably transfer an appreciated asset (or one that is expected to appreciate) to a Charitable Remainder Unitrust or a Charitable Remainder Annuity Trust. They (and/or someone designated by them) must receive an annual cash flow for life (or for the joint lives of the husband & wife) or for a specific number of years (maximum of 20), and the charity designated in the trust as the beneficiary must receive the remainder of the trust after the death of the individual (or after the second death if joint), or after the term of years has expired.
The minimum amount that the individual / couple must receive each year from a Charitable Remainder Annuity Trust is 5% of the value of the asset originally transferred to the trust; in a Unitrust, the individual / couple must receive at least 5% of the annually reappraised value of the trust assets. Charitable Remainder Unitrusts can also waive full current–year distributions if the trust does not generate sufficient income in a given year, and the waived income may be made payable in future years.
If the asset put in the trust has appreciated, no capital gains tax will be paid even if the trustee sells that asset and invests in a diversified income–producing mutual fund portfolio, for example. The individual or couple will receive an income tax deduction based on the their basis in the assets or the “fair market value”, if held long term, in the year that the transfer is made to the trust. If the fair market value is available and elected, the deduction is for the full fair market value of the transferred asset less the present value of the income stream that is to be paid to a “non-charitable” beneficiary. If the trust lasts for a fixed number of years, the deduction will be larger as the number of years decreases. If the trust lasts for a period measured by one or more persons’ lifetimes, the deduction will increase with the age of these persons at the time the trust is established.
The net estate tax result is that no federal estate tax will be due on the value of the Charitable Remainder Trust. How so, you ask? If the donor retains a lifetime interest in a CRT, the trust assets are included in the donor’s estate, but the estate receives a dollar-for-dollar estate tax charitable deduction for the value that passes to the charity.
We at Malleo Financial Services can work together with your
attorney and accountant to help you properly plan and fund a
Charitable Remainder Trust.
For a free consultation, please contact us for an appointment.
*This blog is strictly the opinion of Michael A. Malleo and not those of
ASH Brokerage Corp., nor any of our affiliates.
Malleo Financial Services LLC cannot and will not give any specific tax or legal advice.
Please consult your tax professional or legal professional for such advice.