An Ideal Trust

Creating a charitable gift with tax sav­ings that also benefits family may seem idealistic, but it is exactly the design of a charitable remainder trust (CRT).

A CRT is a tax-exempt trust, usually fund­ed with appreciated assets during life or from a retirement account at death. The trust provides an ongoing stream of in­come to the giver (or other named bene­ficiaries) for their lifetimes or a period of years. When the trust ends, it distributes the remaining assets to the IMB or other designated charity.

Many families look to a CRT to help fulfill their charitable goals by:

  • Converting an appreciated asset owned for more than a year or retire­ment account into long-term income
  • Diversifying non-productive assets by having the trust sell them tax free and reinvesting the proceeds
  • Maintaining the full value of the contribution
  • Protecting assets held inside the trust from creditors

 A CRT provides significant tax savings in three ways: preventing capital gains when selling assets gifted to the trust, receiving a charitable deduction for the estimated remainder going to the IMB when the trust ends, and reducing the total value of an estate based on assets contributed.

The flexible designs and tax benefits of a CRT make them a wise option for many families — especially when needing creative solutions for tax planning.

Example One: Funded During Life with an Appreciated Asset

Jim and Rachel own a 150-acre tract of real estate valued at $1,500,000. The property is highly marketable, and they would like to sell it and gift a portion to the IMB. The challenge is that their cost basis is only $300,000 and they do not want to trigger capital gains taxes.

Gifting the property to a CRT would allow them to sell the property without paying capital gains taxes, invest the full proceeds to pay them 7% of the value of the trust each year for the rest of their lives, and allow them to receive a substantial charitable deduction. If the tax deduction is higher than Jim and Rachel need this year, the unused portion of the deduction can be carried over for up to five additional years. When both Jim and Rachel pass, the balance of the trust is distributed to the IMB.

Example Two: Funded with Retirement Account at Death

Sarah intends to leave her $800,000 IRA to her 47-year-old son. However, she learned a large percentage of beneficiaries withdraw the entire balance within six months, triggering the highest income tax brackets. She also worries about the negative impact of giving such a sizeable sum of money to her son at one time.

Sarah can fulfill her goals and alleviate her concerns by contributing the IRA to a CRT at her death. The trust will not pay any taxes and it will pay her son 5% of the trust balance each year of his life. If the investments of the trust make more than the 5% distributed each year, the distributions will grow over time. At the end of the trust the IMB will receive close to, if not more than, the full original balance of the trust.