Meurer Law Offices, P.C., serves clients in Denver, Greenwood Village, Centennial, Aurora, Littleton, Englewood, Arvada, Westminster, Broomfield, Parker, Castle Rock, Lone Tree, Sheridan, Elizabeth, Kiowa, Lakewood, Parker, Highlands Ranch, Denver County, Arapahoe County, Adams County, Douglas County, Jefferson County, Colorado.
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Charitable Remainder Trust
A Charitable Remainder Trust (“CRT”) lets you convert a highly appreciated asset such as stocks or investments in real estate, into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes and lets you benefit a charity that has a special meaning to you. With a CRT, you transfer an asset into an Irrevocable Trust. This removes it from your estate for estate tax purposes. You also get an immediate charitable income tax deduction which reduces your income taxes. The Trust than sells the asset at market value paying no capital gains tax. The Trust re-invests the funds into income producing assets. For the rest of your life, the Trust pays you income. Since the principal has not been reduced by capital gains tax, you receive more income over your lifetime than if you would have sold the asset yourself. After you die the Trust assets go to the charity you have chosen.
The maximum amount of income you can receive and how much your charitable deduction will be are based on a number of factors including the age of the people who receive the income, the amount of the gift, the cost basis and your income tax bracket.
While a CRT is an Irrevocable Trust, you and your spouse may change the Charitable Beneficiaries. Under certain conditions you may even serve as Trustees. As Trustees you can maintain full investment control of the assets inside of the CRT.
Because the assets are destined for a charity, Charitable Remainder Trusts do not pay any capital gains taxes. These taxes can range from 10%-20% of an asset’s growth and value. Thus CRTs are ideal for highly appreciated assets. For example, suppose you sell a rental property for $1 million when you originally paid $100,000 for the property, upon completion of the sale, you would owe capital gains taxes on $900,000 ($1 million - $100,000). Given a 15% tax rate, the tax would be $150,000. Since CRTs have a charitable intend and do not have to pay capital gains, the full value of any asset transfers into the Trust.
The amount of income to come out of the CRT depends upon the payor percentage that you choose and the amount of income your assets generate while inside the CRT. The IRS states that at a minimum the CRT must distribute at least 5% of the net fair market value of the assets. If you do not need the income one year, you may elect to defer the income with a makeup provision. However, the CRT’s net distributions must eventually equal 5% to be considered by the IRS. When setting the payoff percentage, the higher it is the lower your Charitable Income deduction. Considering market conditions and the possibility that taking out too much may reduce the principal inside the Trust, you should probably not receive income of more than 10% each year.
CRT’s are designed to give the principal to charities when you and your spouse pass away. This bypasses any children who may feel slighted. This can be avoided by combining the CRT with another strategy to make up the difference that goes to the charity. This can involve using the income to purchase life insurances as a tool to make up the difference. Some large estates combine the CRT with a separate Trust to provide cash distribution upon the death of the owner. This Trust than subdivides into individual Trusts for each named heir upon your death. In this scenario everyone wins. The estate owner receives an income stream and tax deductions. The charity gets the principal of the CRT and the children receive a cash distribution.
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Meurer Law Offices
5347 S. Valentia Way, Suite 220
Greenwood Village, Co. 80111
303.991.3544
Estate Planning Attorney
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MEURER LAW OFFICES, P.C.
5347 South Valentia Way, Suite 220
Greenwood Village, CO 80111
Phone: 303-991-3544
