Charitable Remainder Trusts

by Shaun Sommerer

The recognition that a portion of your wealth is not yours to keep no matter how well you plan can be sobering. Some term this unspendable portion of one’s estate their "Social Capital." It is important to realize however, that you do have control and a choice of who will be the beneficiaries of your "Social Capital" if you choose to exercise your right. The only requirement is that the beneficiary of your "Social Capital" be a 501(c)3 organization, i.e. a not-for-profit. For those inclined to make a planned gift to their parish or the diocese, employing a Charitable Remainder Trust (often referred to as a CRT) can truly be a win - win strategy. Unfortunately, the federal and state taxing authorities can become the beneficiary of your "Social Capital" by default if a vehicle such as a CRT is not used to redirect the unspendable portion of your wealth.

Charitable remainder trusts or unitrusts continue to be popular vehicles for making charitable gifts. A CRT tends to be most beneficial to one who owns a highly appreciated asset that does not generate significant income. One example of such an asset would be a piece of real estate that has a substantial fair market value but generates minimal income from cash rent. A second example would be highly appreciated stock or mutual funds that do not pay dividends.

A CRT is one way to convert a highly appreciated non-income producing asset into one that does produce income without incurring the inherent capital gains taxes. To establish a CRT, a donor contributes cash, stock, mutual funds or real estate to a trust created by the donor, and a designated beneficiary (the donor or other) receives a right to an annual payment from the trust. After a specified period elapses (such as a set number of years or the death of the recipient of annual payments from the trust), the property remaining in the trust is transferred to a designated charitable remainder beneficiary to be used as provided by the donor in the trust documents. The donor is allowed a charitable contribution income tax deduction for the present value of the amount the charity will eventually receive from the trust. CRT’s can be set-up with a minimum contribution of $2,000 and can be added to periodically. Once your assets are placed into the CRT, they are no longer in your taxable estate or attachable.

Once the trust is established, the trustee of a CRT can sell any property contributed to the trust without having to recognize any capital gain because a Charitable Remainder Trust is exempt from taxes. Proceeds from the sale, unerroded by capital gains taxes, can then be reinvested by the trustee in securities that produce a much higher total return for the donor. The net result of this is that a donor can receive income for life off of 100% of the value of their appreciated assets, not 60.4 - 72% after tax values. Furthermore, money previously earmarked for taxes is redirected to the charitable organization of the donor’s choosing.