Klenk Law

Can a Charitable Remainder Trust be a Useful part of my Atlantic County Estate Plan?

Posted on Sun May 11, 2014, on Atlantic

Any good estate plan considers the tax ramifications of your death and the possible ways to reduce those taxes. If your estate plan also includes giving money to charity, then a charitable remainder trust might be a useful tool that not only provides you with a way to fulfill your charitable gift, but also reduce your taxes.

A charitable remainder trust (“CRT”) is a trust you may create during your lifetime or at your death that distributes an annuity (CRAT) or unitrust (CRUT) amount to your selected non-charitable beneficiaries for life or a term of years. The remainder passes to charity. The charity receives the “remainder” as a charitable “remainder” trust. Because of past abuses, congress heavily regulates charitable trusts, taking away many of the past advantages. But for the right person a CRT can still provide excellent tax benefits.

A CRT can be an excellent tool for you if: (1) you own assets with low basis that you don’t mind selling and (2) you intend to make gifts to a charity at you death.

In general, a CRT works like this. You form the trust whose terms state that during either a term of years or for your lifetime, the trust will pay to you either a set dollar amount (annuity trust) or a percentage of the trust’s value (unitrust). You transfer into the trust, low basis assets. You receive a current year charitable income tax deduction based on the projected value of the amount passing to charity at your future death. The trustee then sells the assets. The trust does not pay capital gains taxes. The trust pays out to you each year the annuity or unitrust amount.

A portion of what you receive is capital gains, which you report on your income tax return. The assets in the trust, including the deferred capital gains tax assets, are invested and grow, increasing your annual unitrust payment. At your death, the charity receives what remains in the trust.

The tax advantages of a CRT is that you get a current income tax deduction and you avoid immediately paying the capital gains taxes on the assets given to the trust.

For example, if you own an Atlantic County rental property that you paid $100,000 for but is now worth $500,000, the property has a built in capital gain of $400,000. If you sell the property, you will be forced to pay that tax immediately. If you have a charity to whom you plan to give money to at your death, you could have your Atlantic County estate planning lawyer draft a CRT into which you transfer the house. You would then receive a charitable income tax deduction for the year of the gift and when the property is sold, the capital gains are recorded, but not paid. When you get your annuity/unitrust payment, a portion of that payment will be capital gains, which you report on your taxes, but the remainder of the capital gains is stored in the trust where the trustee invests them in order to grow the trust.

Because congress has plugged various loopholes, unless you intend to give assets to charity and have low basis assets you wish to sell, the CRT is likely not your best estate planning choice, but for those that do have charitable intent and the right assets, a CRT can still serve a valuable (and profitable) purpose.

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