What are Charitable Remainder Trusts (CRTs) primarily used by:Tax Deferred Income: A CRT is a special form of irrevocable trust that is exempt from income taxes. This means that property transferred to the CRT may be sold by the CRT without any capital gain taxes being paid. Assume a $1,000,000 asset with a basis of $200,000 and a 20% capital gain tax rate. If the owner sells the asset, there will be $800,000 in gain and a capital gain tax of $160,000 ($800,000 x .2). That means the owner has lost $160,000 of cash. If the property is transferred to a CRT and then sold, there is no tax imposed. Assume a 10% rate of return, the CRT will earn $16,000 per year more than the owner would have earned.
- Clients that want to avoid or defer capital gains on the sale of property.
- Clients that want to obtain a charitable income tax deduction for a gift of property, but continue to receive income from the property for their life or the joint lives of spouses.
- Clients that want to allow their heirs to defer income taxes on retirement accounts they will inherit for longer than would otherwise occur.
- Clients who want to dispose of currently low return assets and acquire higher return assets without the imposition of a current income tax.
Charitable Contribution Deduction: The owner of the property may receive the income over a lifetime or a period of years, not in excess of 20. At the end of that time, the property in the trust passes to the charitable remainder beneficiary. When the trust is formed, the actuarial value of the remainder interest is calculated and deductible, subject to some limitations, on the owner’s income tax return. As an example, a 65 year old transferring $1,000,000 to a 10% unitrust-CRT receives a charitable contribution deduction of $263,000. If it is not all allowed in one year, it may be deducted over a five year period. Each year, the CRT files its own income tax return.