Benefits of a CRT
Reduce income taxes
Reduce or eliminate estate taxes
Avoid capital gains tax on asset sale
Support chosen charities
Generate higher lifetime income compared to direct asset sale
Protect assets from creditors
Potentially leave more to heirs through life insurance trust
How a CRT Works
Asset Transfer: Highly appreciated assets (stocks, real estate) are transferred to an irrevocable trust, removing them from the estate.
Immediate Tax Benefits: Receive an immediate charitable income tax deduction.
Trustee Actions: Trustee sells the asset tax-free, reinvesting proceeds in income-generating assets.
Income Generation: Trust pays a specified income for life or a set term.
Charitable Legacy: Remaining assets are donated to designated charities upon trust termination.
CRT vs. Direct Asset Sale
Tax Implications: CRT avoids capital gains tax, leading to higher net proceeds.
Income Generation: CRT often provides higher lifetime income due to tax savings and potential investment growth.
Asset Protection: CRT protects assets from creditors.
Example: Max and Jane
Asset: $100,000 stock now worth $500,000.
Direct Sale: $60,000 capital gains tax, $440,000 reinvestment, estimated $572,000 lifetime income.
CRT: No capital gains tax, $500,000 reinvestment, estimated $650,000 lifetime income, plus immediate tax deduction and asset protection.
Types of Charitable Trusts
Charitable Remainder Unitrust (CRUT)
Income: Fixed percentage of trust assets, fluctuating with trust value.
Benefits: Potential for income growth as trust value increases.
Considerations: Income may vary annually, suitable for marketable assets.
Charitable Remainder Annuity Trust (CRAT)
Income: Fixed annual amount, regardless of trust performance.
Benefits: Income stability, suitable for older individuals.
Considerations: No inflation protection, best for cash or marketable assets.
CRT Income and Deductions
Income Recipients: You, spouse, or designated individuals for life or a term.
Income Timing: Defer income for potential growth.
Tax Deduction: Based on income amount, asset type, age, and interest rates.
Deduction Limit: Generally 30% of adjusted gross income, with five-year carryover.
Suitable Assets for CRTs
Highly appreciated assets: publicly traded securities, real estate, closely held corporation stock.
Cash is also acceptable.
Trustee Selection
Options: Yourself, corporate trustee, or designated charity.
Considerations: Investment expertise, services, trust administration.
Retain control: Right to change trustee, modify charity (within limits).
Gifting and Estate Planning
Life Insurance Trust: Replace CRT asset value, protect proceeds from estate taxes and creditors.
Benefits: Immediate liquidity, tax-free growth, asset protection.
Conclusion
CRTs offer tax advantages, income generation, and charitable giving. Consult an estate planning attorney for personalized advice.
Disclosures
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