A Charitable Remainder Trust (CRT), often referred to as a Capital Gains Avoidance Trust is another powerful tool to avoid capital gain tax on the sale of appreciated real estate. In addition to avoiding tax on the sale of real estate, a CRT can also be used to avoid capital gain tax on appreciated stock and other personal property. Combining A CRT and a 1031 exchange can be a powerful combination for preserving wealth.
A Charitable Remainder Trust offers the following benefits:
- Avoid capital gain taxes on the sale of appreciated property.
- Generate a lifetime income stream.
- Diversification of investment assets.
- Potentially save estate taxes.
- Benefit a charitable organization near and dear to your heart.
How it works
A donor transfers appreciated property to the CRT. The CRT then sells the property and since it is a tax-exempt trust, it does not have to pay capital gains tax. The CRT then distributes income to the income beneficiaries. This income can last for the lifetime of one or more people or for a specified term of years.
Annuity vs. Unitrust
There are two types of CRTs you may choose to use:
- Charitable Remainder Annuity Trust (CRAT). A CRAT pays afixed dollar amount of the trust assets each year.
- Charitable Remainder Unitrust (CRUT). A CRUT pays an amount equal to a percentage of the trust value at the beginning of each year, usually 5% to 8%.
Taxation
Most CRT payouts are taxed to the beneficiary as ordinary income and/or capital gain. Donors receive a current federal income tax deduction for their gift. This amount is determined by using a formula involving factors such as the donor’s age and the payout percentage they choose.
Payout Flexibility
A Unitrust offers four flexible payout options. To determine which payout option makes the most sense for your situation, please consult with a qualified planned giving specialist.
The Charitable Remainder Trust is a powerful financial planning tool but there are complex rules involved so it is critical you consult with an expert in planned giving strategies. We have teamed up with people who have nearly 40 years experience in planned giving. Our expert planning team can explore whether this strategy makes sense for you and if it does, we can customize a charitable trust arrangement that considers your personal financial, tax, estate and succession planning goals.
To download our Free Wealth Guide on the Charitable Remainder Trust, click here.