Tax Efficient Disposition of Assets (CRT & CLT)

Potential for Lifetime Income, manage Taxes and Benefit a Charity

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Charitable Remainder Trusts and Charitable Lead Trusts are not suitable for all investors.

1. The Charitable Remainder Trust (CRT)

An irrevocable Charitable Remainder Trust (CRT) allows you to make a generous gift to one or more charities, while eliminating your capital gains taxes on the sale of appreciated property, receive an immediate income tax deduction, and receive an income for life or for a fixed term of up to 20 years.

Benefits of a CRT

• Gift to one or more charities
• Avoid capital gains tax
• Manage your current Income tax with charitable income tax deduction
• Potentially receive income for life
• Manage your estate taxes
• Leave more to your heirs or others by using Life insurance trust to replace the gifted asset

Disadvantages of a CRT

• Transfers are irrevocable
• Terms of the trust are unchangeable (though assets and charitable beneficiaries may change)
• Assets that pass to the charity do not pass to heirs
• Limitation on the deduction you can take. Based on several factors including your life expectancy, number of heirs you select, and type of CRT you select

When should you consider a CRT

You are contemplating a transaction which will generate a significant tax liability
You need income now or in the future
You would like to donate a significant gift to charity

Assets that may be appropriate for a CRT include:

A Small Business

Sole Proprietorships, Partnerships, Limited Liability Company, C-Corporation

Residential Real-estate

• Secondary Residences, Rentals

Commercial Real-estate

• Shopping centers, Medical centers, Offices, apartment complexes, warehouses, Industrial, Farm land

Securities

• Stocks, Bonds, Mutual Funds, etc.

CRT Illustration

The charitable remainder trust can be tailored to meet the donor’s needs and objectives. It can be a vital and rewarding part of the donor’s financial, retirement and estate planning. It can be a means of increasing the donor’s spendable income or providing a reliable income for another person, eliminate capital gains taxes on the sale of appreciated property, receive an immediate income tax deduction, while carrying out the donor’s philanthropic objectives. Always check with you tax and financial advisors before implementing any gift plan.

Convert an appreciated asset into lifetime income

Let’s make a comparison of income after the sale with and without using a charitable remainder trust.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Assumptions:

• The asset is valued at $500,000 with a cost basis of $100,000.
• You have owned the asset for more than a year.
• You have no capital gain losses from previous years to carry-forward.
• Your Federal income tax rate is 35%.
• 15% Federal capital gains tax only (State capital gains tax may also apply).

*With a CRT, you can take an immediate charitable income tax deduction of $90,357. Because you are in the 35% tax bracket, your current federal income taxes will be reduced by $31,625.

Sale of Asset without a CRTIf the asset is sold without a CRT, you must pay capital gains tax, which significantly reduces the amount of money you have left to reinvest. Resulting in a lower annual income and total lifetime income. Also, you can not take advantage of the charitable income tax deduction.

Sale of Asset with a CRTIf the asset in sold with a CRT, you avoid capital gains tax, which may increase the amount of money you have left to reinvest. Resulting in a higher annual income and total lifetime income. Also, you can take advantage of the charitable income tax deduction and satisfaction of making a deferred gift to a charity of your choice.

If you do not wish to decrease the amount your heirs inherit from your estate, you can use the cash savings from the charitable income tax deduction as well as the Lifetime income payments to fund an irrevocable life insurance trust benefiting your heirs.

2. The Charitable Lead Trust (CLT)

When you should consider a CLT

• Have significant investable assets
• Are interested in making significant contributions to a favorite charity
• Seek to make future gifts at a significantly discounted gift tax cost
• Own assets you expect to substantially appreciate in value
• Wish to reduce the value of your estate to help minimize future estate tax liabilities faced by your children
• Do not need the income from the assets being donated

Benefits of a CLT

• Enables donor to experience the impact of their giving during their lifetime
• Helps to substantially reduce the value of a taxable gift in that the gift is made for a future interest (known as an estate freezing technique)
• Provides a gift and estate tax sanctuary for assets expected to appreciate in value
• Allows donor to donate to charity and keep trust assets within the family
• Allows donor to postpone the non-charitable beneficiary's receipt of the trust assets
• Allows donor to control the payment method, term of the trust and beneficiaries
• Helps to minimize donor’s taxable estate, thus potentially reducing federal estate tax liabilities

Disadvantages of a CLT

• No income tax deduction unless you are also the "owner" of the charitable lead trust
• Requires an irrevocable commitment
• Requires the charitable payment to be made each year, regardless of whether there is sufficient trust income available.

CLT Illustration

The charitable lead trust can be a great way for an individual to leverage his or her generosity, producing tax savings that can be used to provide greater benefits to both the donor’s favorite charity and his or her own family. When federal interest rates are low, there is an incentive to create and fund a lead trust because lower interest rates generate higher charitable deductions for lead trusts. Lead trusts can reduce the size of the donor’s taxable estate. All appreciation in the value of the trust properties occurring after funding the trust could be completely free of gift and estate taxes.

The CRT & CLT must be irrevocable and meet various technical requirements. Also, choosing the appropriate assets to place in trust is important to pursue higher yielding investments while managing taxes.

We would like to discuss this idea with you to see if we can find a way to address both your tax and charitable giving goals. For a free initial consultation please contact us today.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.