Have you met Bud? He is a kind man who is nearing retirement. He also owns some property that is not yielding the financial return he had expected. To double Bud’s trouble, the property is highly appreciated. He would have to pay Uncle Sam a large amount of capital gains tax if he found a willing buyer. Oh, one other thing about Bud. He has a strong affinity for the mission and vision of the Alabama Humanities Foundation. He would like to make a gift but really isn’t aware that he can also help himself.
Many donors are surprised to find that using highly appreciated but low-earning property to fund an income-producing charitable gift provides a wonderful combination of personal and philanthropic benefits.
The most versatile is the charitable remainder trust (CRT). The donor places cash or property in a qualified CRT and the governing trust agreement. In Bud’s case, he would like the trustee to either be the Alabama Humanities Foundation (AHF) or his long-time financial institution. The beneficiaries are the person(s) who will receive income from the CRT and AHF, who will receive the trust’s principal at its termination. In most situations, the donor is also the income recipient.
Because the trust is irrevocable, assuring an eventual gift to AHF, the donor receives a current income tax deduction. The resulting tax savings reduce the net cost of funding the trust, which increases the effective rate of return.
A further financial benefit of a CRT is freedom from capital gains taxation in two ways. First, if funded with capital gain property, there is no tax payable on the past appreciation. Second, any capital gains subsequently realized from investing and selling is added to the trust assets, with no tax payable. Individuals should check with their accountant, attorney or other tax advisors.
Sounds complicated, but it is not.
When CRT terminates at the death of the last income recipient, or upon expiration of a fixed term of years, there are two other benefits: no estate settlement costs are attributable to trust assets passing outside of probate and the remainder values are not subject to federal estate tax.
The most popular trust agreements are CRATS and CRUTS. We will save the exact details on those for another day.
If you would like to know the nuts and bolts about CRATS and CRUTS, phone me at the AHF office (205) 558-3992, or e-mail me at firstname.lastname@example.org.
Written by: Paul L.