Are you sitting on a veritable gold mine in stocks or real estate? Or maybe you’re planning to sell your business interest for a tidy sum. In any event, you’ll have to pay the tax piper one way or another through income tax, estate tax or gift tax, or a combination of all three.
Fortunately, there’s a way to create a triple tax bonanza with just one stroke of your pen.
Strategy: Set up a charitable remainder trust (CRT). Not only do you slash your family tax bill, you reward a deserving charity. You win, the charity wins … and Uncle Sam loses.
As an added incentive, a CRT can help avoid the new 3.8% Medicare surtax (see box below).
Here’s the drill: You transfer appreciated property—like stock, real estate or a business interest—to a trust set up to last for your lifetime or a specific term of years. The trust provides payments to the designated “income beneficiary” (e.g., you or your spouse) during the CRT’s existence. The income beneficiary pays tax on the annual trust distributions. At the end of the term, the remainder goes to the charity named at the outset.
The tax benefits are immediate and they keep coming. Here are seven advantages:
- You’re entitled to a current tax deduction for the value of the remainder interest eventually passing to the charity. The deduction is based on IRS tables.
- You avoid a potentially large capital gains tax on the sale of appreciated property.
- The income beneficiary can rely on a steady stream of income from the trust.
- You effectively retain the right to receive income from those assets, even though the assets are removed from your taxable estate.
- You can eliminate or minimize any potential gift tax liability on the transfer of property to the CRT with proper planning.
- The trust may be a tax-advantaged vehicle for transferring business interests.
- You make a substantial gift to the charity of your choice. If the charity subsequently sells the property, it can invest the proceeds in assets that would produce a high-income yield without paying tax on the gain.
CRTs come in two basic “flavors”: Charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). No matter which one you use, the income beneficiary must be entitled to an annual payment each year for life or a period of no more than 20 years.
With a CRAT, the payment must be a fixed amount at least equal to 5% of the initial value of the trust property. In contrast, a CRUT requires payment of a fixed percentage (not less than 5%) of trust assets.
Note: There are certain other restrictions in the law. For instance, a trust won’t qualify as a CRT if the annual payout exceeds 50%. Also, it must be clear that the charity will receive at least 10% of the donated assets. Finally, any type of CRT is irrevocable. Once you set up the trust, you can’t get your assets back.
Tip: A CRT isn’t a free ride. You must pay fees for establishing and administering the trust.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/33838/give-to-charity-before-uncle-sam "