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Saving taxes while helping others

By Staff | May 22, 2019

Michael R. Dreyer

Financially successful individuals often look for ways to fund charitable interests in a tax efficient manner. Charitable trusts can be an effective tool in meeting this objective. Several variations of a charitable trust exist, and each serves a specific purpose.

When a Charitable Remainder Trust (CRT) is established, a gift of cash or property is made to an irrevocable trust. The donor retains an income stream from the trust for a specified number of years (no more than 20 years) or for life. At the end of the term, the qualified charity specified in the trust document receives the remaining assets in the trust.

The grantor of the trust receives an income tax deduction, in the year of the transfer, for the present value of the remainder interest that will ultimately pass to the charity. The grantor is taxed based on the amount of the payments to him and the income earned at the trust level.

A Charitable Remainder Trust is often used when an individual has a highly appreciated asset which is being sold. The individual transfers the appreciated property to the CRT, the CRT then sells the asset. Because the CRT is not a taxable entity, the gain on the sale is not recognized at the time of the sale. This allows the entire sale proceeds to be invested in a diversified portfolio. Had the asset been sold at the individual level, capital gains tax would be payable immediately, reducing the sale proceeds available for reinvestment by as much as 23.8 percent due to federal taxes. The CRT is an excellent method for deferring or possibly avoiding the capital gains tax on the sale.

There are two types of CRT: A Charitable Remainder Annuity Trust and a Charitable Remainder Unitrust. With the annuity trust, the annual annuity payment remains the same over the life of the trust, while with the unitrust, the payment changes each year based on the value of the trust’s assets at the predetermined payout percentage.

A Charitable Lead Trust (CLT) is established when an individual (or a corporation) transfers cash or property to an irrevocable trust. A charity then receives an annuity payment for a number of years. At the end of the term the assets in the trust are transferred to the non-charity remainder beneficiary – typically, a child or grandchild. The donor receives a charitable income tax deduction in the year the trust is created. The deduction is based upon the present value of the annuity payments the charity is to receive. For gift and estate tax purposes the value of the gift to the trust’s remainder beneficiary(s) is discounted by the present value of the annuity payments to the charities.

Charitable lead trusts can be established during one’s lifetime or through a will. In the right circumstances, they can be an excellent way to avoid gift or estate taxes. It has been reported that CLTs were used extensively in Jacqueline Kennedy’s estate plan. Before executing a charitable trust, one should consult with their tax advisor and estate attorney.

Michael R. Dreyer is president of the Tampa Bay Trust Company, a division of The Sanibel Captiva Trust Company.