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Rewrite history: Revoke your ill-fated charitable trust

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Did you set up a charitable remainder trust (CRT) at the height of the bull market? If so, your returns may have slipped lately as the market fluctuates. You may be rethinking your idea of setting up a CRT in the first place.

Strategy: Undo the CRT with the IRS's consent. Essentially, you can terminate the arrangement as long as you make sure the charity still receives a piece of the pie.

When you originally establish a CRT, you can donate appreciated assets—for example, stocks and other securities—to a trust. The trust then pays annual income to your designated beneficiaries. At the end of the trust term, the remainder goes to the charity.

Your immediate tax reward is a charitable tax deduction (based on the gift's future value) in the year the trust is established. Plus, you never need to pay any tax on the asset's appreciation.

But since the stock market has wobbled, the income generated by the trust for the beneficiaries (e.g., your spouse or children) may not be as much as you'd like. What's more, the IRS taxes the beneficiaries on the income payouts at ordinary income rates. If you had your druthers, you would do things differently today.

Good news: Surprisingly, the IRS is relatively lenient about letting you revoke a CRT. Of course, all parties to the arrangement—including your beneficiaries and the charity—must agree to the revocation. And the charity is entitled to gain a proportionate share of the assets in the trust.

Would a charity agree to this deal? Probably so. In most cases, it's all too happy to get its hands on assets sooner rather than later, even if it's not the whole enchilada.

Caution: Consider the impact of state law before you start ripping up documents. Your tax pro can help you work through the revocation details.

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