Did you know that it is possible to turn substantial personal property holdings into a lump of cash, avoid capital gains taxes, and use that money to pay yourself or beneficiaries and a charity? The irrevocable, tax-exempt charitable remainder trust (CRT) allows you to set up a trust and transfer property to it that you wish to donate to an IRS-approved charity. That organization becomes the trustee, investing and managing the funds and paying out a portion of the fund’s income to your named beneficiaries until your death, when the entirety of the fund at that time becomes property of the charity. In addition to the fact that the funds kept by the trust are untaxed, there are three other main tax benefits to setting up a CRT.
Personal income tax deduction
Once you have set up and donated the money to a CRT, you may take an income tax deduction for the full value of your gift and spread it how you would like over five years. Note that the full value of your gift, however, equals the donation amount after subtracting the interest you will receive from the trust over your lifetime. For example, if you donate $500,000 to a CRT, but expect to receive from it $250,000 in interest throughout your lifetime, your total deduction would be $250,000. Because you specify either the annuity or percentage amount that you will receive annually from the trust up front, and it cannot be changed, it is important to be judicious with this decision so as to maximize both your deduction and the amount the charity will receive when you decease.
Avoiding capital gains
Because the charity is the one who will sell the property, whether land, stock, or anything else, it avoids tax on the sale. This would not be true if the owner were to sell the property. In this way, the sale makes a tax-free profit for the charity. And when the charity invests the profit and pays you interest at regular intervals for the remainder of your life, you also reap the benefits by avoiding capital gains taxes that you would have paid–a significant bonus for your overall wealth management strategy.
Estate tax help
As noted above, at your passing, the donated property transfers to the ownership of the charity. This is also helpful to those who will inherit your estate. Because that property is no longer considered part of your estate, it will not be included in the calculation of your estate tax.
As always, our friendly personal financial advisors at Wendell Charles Financial would be happy to talk with you if you are ready to establish a CRT or would like more information. Book a meeting today to get started!
This information is not intended to be a substitute for specific individualized tax or legal advice. Wendell Charles and LPL Financial do not provide legal advice or services. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
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