The charitable remainder trust is one of the least known charitable tools, but it can have the largest financial impact for the donor and your nonprofit.
The Charitable Remainder Trust (CRT) creates three gifting opportunities:
- Current gifts today because of the significant tax deductions for the donor.
- Annual gifts because of the lifetime income stream the donor receives.
- Principle of the trust goes to charity when donor passes.
At a high-level, the CRT is a tool with which the donor can dispose of highly appreciated assets without incurring capital gains taxes or other taxes. This could include such things as highly appreciated stock, real estate, office buildings, apartments or duplexes, land, farm equipment, etc. The donor gifts the asset to the trust and then the trust sells the asset to a willing buyer. The trust receives cash for the sale and then the trust invests that cash into a professionally managed portfolio which provides the donor with a lifetime income stream.
Potential Benefits for Donor
- Significant tax deductions for possibly up to six years.
- Selling the assets, such as real estate, and avoiding all capital gains tax and recapture of depreciation taxes.
- Lifetime income stream.
- Asset protection from creditors or lawsuits.
Potential Benefits for Nonprofit
- Current gift today created by the donor's tax deduction.
- Yearly gifts from the donor because of increased income stream of donor.
- Principal of the trust donated at the donor's death.
- Deeply enhanced and enriched relationship with the donor because this financial tool provides so much value to the donor, their family, and the charity.
To help illustrate how a CRT works, let’s look at Mary (This is a hypothetical example of Mary, for illustrative purposes only of Mary). Mary is 80 years old and sadly, her husband Bill recently died. When Bill and Mary were in their 20s, they purchased a farm and they lived there for their entire marriage. However, now that Bill has died, Mary wants to downsize and sell the farm because she has no need for so much property or such a large home.
Bill and Mary originally purchased the farm 60 years ago for $100,000. Today, the farm has appreciated in value and is now worth $2,000,000. If Mary chose to outright sell the farm, she would be required to pay a capital gains tax on the $1,900,000 appreciation of the farm. Her combined capital gains tax and ordinary income tax on the recapture of depreciation is 35%, this means Mary’s taxes would be $665,000. In the end, Mary would only net a total of $1,335,000 for the sale of her $2,000,000 farm once the taxes are taken out. If Mary were then to invest that $1,335,000 in a professionally managed portfolio with a hypothetical return of 6%, she would then be left with a potential income stream of only $80,000 per year.
But let’s say that Mary chose to gift the farm to a charity through a CRT instead. In this case, the entire value of the farm, $2,000,000, would go to the charity at her death. The CRT can then sell the farm tax free and reinvest the $2,000,000 into a professionally managed portfolio with a hypothetical return of 6%. This would then provide Mary with a potential income stream of $120,000 per year. Some of this may be taxable based on how the investment stream is managed in the trust. Mary would also get a tax deduction based on the IRS formula for someone who is age 80, for Mary this would be 80%. This means that 80% of the $2,000,000, which is $1,600,000, can be used to lower her taxes for up to 6 years or until the deduction is gone.
Over the past 30+ years we have been involved in a significant number of discussions that involved charitable remainder trusts. Most of the time we have managed the process between the donor and the nonprofit. We determine if the charitable remainder trust fits the donor’s financial situation and their charitable intent. We can work with your tax and legal professionals to provide them information needed to facilitate the entire process ranging from the valuation of the asset, the establishment of the trust, gifting the asset to the trust, and the sale of the asset within the trust. We also help to reposition the cash into an investment portfolio to provide an income stream for the donor and spouse’s lifetime. We also can coordinate the tax deductions, yearly administration, and trust tax returns.
In some cases, we have actually directed a donor away from the charitable remainder trust because they were focused on one aspect of the transaction versus the entire transaction and this would have put the nonprofit at considerable risk and potential legal conflict. We always want to ensure a charitable gift is a good fit for both the donor and the nonprofit.
If you decide a CRT is appropriate for your situation, it will be important to consult with qualified tax and legal professionals to create your CRT.
If you would like to learn more or discuss a possible donor situation, feel free to contact Bill at (913) 322-9177.
This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes a 6% annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.
Financial Professionals do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.
Bill Eckert, CAP® is a registered representative and investment advisor representative of Securian Financial Services, Inc. Securities and Investment Advisory Services offered through Securian Financial Services, Inc. member FINRA/SIPC. Renaissance Financial Corporation is independently owned and operated. Address: 7500 College Boulevard, Overland Park, KS 66210. (913) 322-9177. 5040537 11/2022