Fortunately, there’s a way to create a triple tax bonanza with just one pen stroke. Set up a charitable remainder trust (CRT). Not only do you slash your family tax bill, you’ll reward a deserving charity in the process. You win, and the charity wins. The tax collector loses.
Here’s how it works: You transfer appreciated property—such as real estate, a business interest or other stock—to a trust set up to last for your lifetime or a specified term. The trust provides payments to the designated “income beneficiary“ for a specified period of years or your lifetime.
For instance, you might name you and your spouse as the income beneficiary. The beneficiary pays tax on the annual amounts from the trust. At the end of the term, the remainder is transferred to the charity named when you set up the trust.
The tax benefits are immediate, and they just keep coming. For instance:
• 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 assets.
• The income beneficiary can rely on a steady stream of income from the trust.
• The assets are removed from your taxable estate, but you effectively retain the right to receive income from those assets.
• With proper planning, you can minimize or eliminate any potential gift-tax liability on transfers to the CRT.
• You make a substantial gift to the charity of your choice. If the charity subsequently sells the contributed assets, it can invest the proceeds in assets that would produce a high-income yield without paying tax on the gain.
These trusts come in two basic flavors: CRATs (charitable remainder annuity trusts) and CRUTs (charitable remainder unitrusts). No matter which you use, the income beneficiary must be entitled to an annual payment each year for life or for a period of no more than 20 years.
With a CRAT, the payment must be a fixed amount at least equal to 5 percent of the initial value of the property. A CRUT requires payment of a fixed percentage (not less than 5 percent) of trust assets.
Note: CRTs face certain restrictions. For instance, the charity must receive at least 10 percent ownership of the affected assets. Also, any type of CRT is irrevocable. So, once you set up the trust, you can’t get your assets back.
Final tip: A CRT isn’t a complete free ride. You’ll pay fees for establishing and administering the trust. But the benefits are usually well worth the price of admission.