Giving While Receiving
The Financial Benefits of Charitable Remainder Trusts
By Martin S. Finn, CPA, LL.M, Lavelle & Finn, LLP
Martin S. Finn is a founding partner of Lavelle & Finn, LLP in Latham, NY where he counsels clients on estate, financial, tax, business and elder law issues.
He is a frequent lecturer and, with his partner John H. Lavelle, has authored Cents & Sensibility: The Practical Guide to Money & Aging; The Complete Trust Guide; and Estate Planning Techniques for Mid-Sized Estates.
As the Chief Volunteer Officer of the Schenectady County Chamber of Commerce, Mr. Finn serves on the Appointing Authority of The Schenectady Foundation.
With the memory of tax filings behind us, it is a good time to review personal financial planning goals and objectives. Part of this planning may involve consideration of charitable gifts to be made this year. To some a charitable gift means irrevocably giving up ownership of cash or some other gifted asset (e.g., appreciated stock or real estate). There is a planning option available, however, which will allow you to make a deferred gift to your favorite charitable institution and retain, and probably enhance, the monthly income stream from your gifted asset. This technique, known as a Charitable Remainder Trust (CRT), also can have significant income and estate tax benefits if structured properly.
A CRT is an irrevocable trust which provides for an annual annuity payment to be paid to you for a term of years (not to exceed 20 years) or for your life. You can also provide that the annuity payment will continue after your death for your spouse’s and/or children’s benefit. At the end of the annuity term, whatever is left in the trust is distributed to the charities you designate.
In most cases, the best assets to transfer to a CRT are highly appreciated investments or real property that generates little or no income. After they are transferred to the trust, the trust can sell the assets, with no capital gains tax cost, and invest the entire sale proceeds in higher income generating investments that can help pay the annual annuity payment.
EXAMPLE: Assume Mrs. Schenectady is 75 years old and would like to contribute her 4,000 shares of stock, which generates little annual dividend income, to The Schenectady Foundation. She also needs to generate some more retirement income. Assume further that the stock is worth $200,000 and that her cost basis is $50,000.
If Mrs. Schenectady contributes her stock to a CRT that provides for a 7 percent annuity for the rest of her life, the trust could sell the stock and not pay any tax on the $150,000 capital gain ($200,000 selling price less $50,000 cost basis). The entire $200,000 could be invested to generate higher income in order to pay the $14,000 annuity ($200,000 x 7 percent) due to her each year. This annuity amount could also be paid in monthly or quarterly installments.
In addition to getting more income from the trust than she was getting from her stock in the year that the contribution to the trust is made, Mrs. Schenectady is allowed to take a $105,000 charitable contribution deduction on her tax return. This is an actuarially calculated amount that equates to Mrs. Schenectady’s lifetime right to the annual annuity. If she is unable to use all of that deduction in that year, she can carry forward the unused balance for five years to be used to offset income in those years. The value of the stock is also removed from her estate for estate tax purposes with no gift tax cost.
There are many details to the operation of a CRT and many options available to you to create a CRT that best suits your needs and objectives. If the idea interests you, or if you are interested in learning about other estate planning options, please call Robert Carreau at The Schenectady Foundation (518-272-6402), and we can help you analyze the benefits of this wonderful planning opportunity and discuss how it might fit into your personal financial plan.