1. What does a CRT
The trustee then sells the asset at full market
value, paying no capital gains tax, and re-invests the
proceeds in income-producing assets. For the rest of
your life, the trust pays you an income. When you die,
the remaining trust assets go to the charity(ies) you
have chosen. That's why it’s called a charitable
Years ago, Max and Jane Brody (ages 65 and 63) purchased some stock for $100,000. It is now worth $500,000. They would like to sell it and generate some retirement income.
If they sell the stock, they would have a gain of $400,000 (current value less cost) and would have to pay $60,000 in federal capital gains tax (15% of $400,000). That would leave them with $440,000.
they re-invest and earn a 6% return, that would provide
them with $26,400 in annual income. Multiplied by their
life expectancy of 26 years, this would give them a
total lifetime income (before taxes) of $686,400.
Because they still own the assets, there is no
protection from creditors and no charitable income tax
deduction is available.
The trustee invests the proceeds in income-producing assets. The same 7% return will produce $35,000 in annual income which, before taxes, will total $910,000 over their lifetimes. That's $145,600 – almost 20% – more in income than if the Brodys had sold the stock themselves.
Plus, they can take a charitable income tax
deduction of about $117,070. Since they are in a 36% tax
bracket, this will reduce their current federal income
taxes by $42,145.
The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income will increase as the value of the trust grows.
Sometimes the assets contributed to the trust
(like real estate or a closely-held corporation) are not
readily marketable, so income is difficult to pay. In
that case, the trust can be designed to pay the lesser
of the fixed percentage of the trust’s assets or the
actual income earned by the trust. A provision is
usually included so that if the trust has an off year it
can "make up" any loss of income in a better year.
This option is usually a good choice at older ages. It doesn't provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year. It's best to use cash or readily marketable assets to fund an annuity trust.
In either (unitrust or annuity trust), the IRS
requires that the payout rate stated in the trust cannot
be less than 5% or more than 50% of the initial fair
market value of the trust's assets.
The income can also be paid to your children
for their lifetimes or to any person or entity you wish,
providing the trust meets certain requirements. In
addition, there are gift and estate tax considerations
if someone other than you receives it. Instead of
lasting for someone's lifetime, the trust can also exist
for a set number of years (up to 20).
It is usually limited to 30% of adjusted gross
income, but can vary from 20% to 50%, depending on how
the IRS defines the charity and the type of asset. If
you can't use the full deduction the first year, you can
carry it forward for up to five years. Depending on your
tax bracket, type of asset and type of charity, the
charitable deduction can reduce your income taxes by
10%, 20%, 30% or even more.
However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustee.
Before naming a trustee, it's a good idea to
interview several and consider their investment
performance, services and experience with these trusts.
Remember, you are depending on the trustee to manage
your trust properly and to provide you with income.
You can take the income tax savings, and part
of the income you receive from the charitable remainder
trust, and fund an irrevocable life insurance trust. The
trustee of the insurance trust can then purchase enough
life insurance to replace for your children or other
beneficiaries the full value of the asset you have given
Life insurance can be an inexpensive way to
replace the asset for your children because every dollar
you spend in premium buys several dollars of insurance.
Insurance proceeds are available immediately, even if
you and your spouse both die tomorrow. And, in addition
to avoiding estate taxes, the proceeds will be free from
probate and income taxes.
You convert a highly appreciated asset into lifetime income, paying no capital gains tax when the asset is sold. You remove the asset from your estate, reducing estate taxes that will be paid when you die. And, you receive a charitable income tax deduction in the year you transfer the asset to the trust, reducing your current income taxes.
With the life insurance trust replacing the full value of the asset, your children receive much more than if you had sold the asset yourself, and paid capital gains and estate taxes. Plus the proceeds are free of income and estate taxes and probate.
Finally, you will make a substantial gift to a
favorite charity. And because the charity knows it will
receive the gift at some point in the future, it can
plan projects and programs now—benefiting even before
receiving the gift.
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