Planning that involves highly appreciated property takes into account the possible reduction, elimination, or deferral of capital gains taxes. These plans often must consider potential estate and/or gift taxes that may apply when transferring capital gains assets to others during your lifetime or in your estate. The lifetime unified credit is currently quite generous, but what will that credit be after 2025?
A charitable remainder trust (CRT) may enable you to build a financial and tax plan that will take into account both tax savings and personal philanthropy.
There are two types of charitable remainder trusts —a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT).
A CRAT sets a fixed lifetime rate of payment not less than 5%, which, when multiplied against the value of the property contributed to the trust, determines the fixed annual annuity amount. The payment amounts remain constant throughout the trust’s term, regardless of its annual investment performance.
A CRUT fixes the rate and calculates the payment amount for the first full or partial calendar year when multiplied against the value of the property contributed to the trust. At the close of each calendar year, the investments in the trust are revalued. The annual revaluation amount is multiplied by the fixed rate to determine beneficiary payments for the succeeding calendar year. While this may involve some annual market risk, a CRUT is anticipated to provide some advantages over a CRAT:
Revaluation over the years may serve as a hedge against inflation.
Rates fixed for a CRUT are generally higher than rates for a CRAT given identical beneficiary data.
Additional contributions may be made to a CRUT over the years to increase the value of the trust, thus increasing its beneficiary payments.
In addition to the philanthropic commitment set out in a CRT to pay the remainder to charity at the end of its term, immediate tax advantages may provide significant front-end economic benefits to the donor/s.
An income tax charitable deduction for the calculated present value of the charitable portion of the contribution.
Avoidance of initial tax on the long-term capital gain applicable to the property contributed to the trust.
Potential tax-advantaged annual beneficiary payments as reported on IRS Form K-1 each year.
Avoidance of federal estate taxes at the end of the donor’s lifetime since all property remaining in the trust will be distributed to charitable cause(s).
As an additional benefit, plans may be designed to replace the value of the property used to fund the trust so that heirs may receive all or a portion of the value in the future free of gift and estate taxes.
For more information about CRTs and other planning strategies, please contact us at plannedgiving@afhu.org or 212.607.8524.
