Tax Planning I: Charitable Remainder Trusts

With the Biden administration in power, an increase in taxes may be coming fast. The impact may be on many areas, for example, income tax, capital gain, estate tax, etc. Therefore, proper planning is more relevant than ever. This series reviews some common tax deferral strategies. One such strategy available in many states, including Ohio, is the charitable remainder trust.

             In essence, a charitable remainder trust (“CRT”) is a trust that is funded by an individual (“donor”) during life. The CRT makes distributions to a non-charitable beneficiary, which can be the donor or the spouse, for life or a term up to 20 years. After that, any remaining property may pass to one or more charities. The tax benefit is that when you fund the trust, you can claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — known as a charitable remainder unitrust (CRUT). CRUT may be preferable for some people because it allows the income to keep up with inflation. Also, a donor can make additional contributions.

The IRS requires that the present value of the remainder interest must be at least 10% of the initial value of the trust assets. This determination is made at the time the assets are transferred (it’s an actuarial calculation based on the trust’s terms).

The benefits of a CRT are:

  • Fixed income for life
  • Avoid capital gains tax on the sale of your appreciated assets
  • Charitable income tax deduction for remainder portion of your gift

An example (illustrated at Ohio State University website)

Susan, 75, wants to make a gift to The Ohio State University Foundation but would also like more income in the future. Susan creates a charitable remainder unitrust with annual lifetime payments to her equal to 5% of the fair market value of the trust assets as revalued annually. She funds the trust with assets valued at $500,000.

Susan receives $25,000 the first year from the trust. Subsequent payment amounts vary each year depending on the annual valuations of the trust assets. She is eligible for a federal income tax charitable deduction of $299,845* in the year she creates and funds the trust. This deduction saves Susan $95,950 in her 32% tax bracket.

*Based on a 1.2% charitable midterm federal rate. Deductions and calculations will vary depending on your personal circumstances.            

Charitable Remainder Trusts requires careful planning. Before you act, please discuss your options with us at 440-835-2271 or your trusted attorney/CPA.

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