Charitable trusts let you avoid tax when you sell appreciated assets such as real estate, a business, or securities. This requires splitting the asset into two parts (an income, payable for a term of up to 20 years or a lifetime, and a remainder, payable when the income ends), and giving one to charity. The most common form is the charitable remainder trust (“CRT”). You can save up to $150 in income tax for every $1,000 of long-term capital gain deferred. Here’s how it works:
- Establish the trust with one or more charitable beneficiaries. You can act as trustee and manage assets yourself, subject to the “prudent trustee” rule, and even change beneficiaries.
- Give property to the trust. You get an immediate deduction equal to the present value of the remainder interest you give, calculated according to your age, the income interest you keep, and the current “Section 7520” rate. You also eliminate the value of your gift from your taxable estate.
- The trust sells assets, tax-free, and reinvests the proceeds.
- The trust pays you income equal to a percentage of trust assets (“unitrust”) or a specific dollar amount (“annuitrust”). You can draw income now, or wait until a later date.
- At your death, the trust remainder passes to charity.
- Alternatively, a charitable lead trust pays income to charity and leaves the remainder for you or your heirs.
For instance: You are a 60 year-old male, and you have $1.0 million in stock with a basis of $250,000. The Section 7520 rate is 5.6%. If you sell the stock outright, you’ll pay up to $150,000 in tax, leaving that much less to reinvest. However, if you give it to a CRT and keep a 6% income, you’ll get a $312,349 deduction and keep the full $1.0 million to reinvest.
Charitable gift annuities are partially-deductible gifts in exchange for annuities payable directly from a charity. Deductions are calculated using the same rules as for charitable trusts. This avoids establishing a trust and managing assets. But there’s no flexibility to invest sale proceeds or change beneficiaries. And you have to rely on the charity to make ongoing annuity payments. (Most charities buy commercial annuities to secure payments.)
Most donors use charitable trusts to sell appreciated assets. But you can also use them for supplemental retirement savings. You’ll get up-front deductions for the income or remainder interests you give.
There are no anti-discrimination rules; fewer annual reporting requirements than with qualified plans; and no required distribution dates or amounts.
Remainder trusts leave nothing for your heirs. With income and estate taxes devouring over 80% of large qualified plan balances, this may be less of a problem than it seems. You can also use tax savings to buy life insurance in an irrevocable “wealth replacement trust.”
If you have any questions in regards to selling appreciated assets, please do not hesitate to contact us.