Tax Avoidance Series: Charitable Remainder Trusts

Tax Avoidance Series: Charitable Remainder Trusts

The tax code is full of rules to incentivize certain behaviors. One of the incentives built into our tax laws is charitable giving. Folks who decide to give to charity can lower their taxable income in proportion to the charitable donations made in a certain year. 

As you can imagine, a tool that lowers taxable income can be incredibly useful. Not only can you choose your preferred charity to get your money instead of the government, but you can also offset a large influx of income or capital gains e.g., you sell a piece of real property or take a large amount out of a traditional IRA. 

Charitable Remainder Trust

The tax benefits of charitable giving can be maximized through the use of a Charitable Remainder Trust (CRT). A CRT is an irrevocable trust, meaning that the trust creator (the Grantor) can no longer unilaterally change the trust once it’s created. If a change is desired, the Grantor must have the permission of the charitable beneficiaries. 

When the Grantor puts assets into the CRT, some of the assets are earmarked to go to charity. This earmarked amount is called the “remainder.” The Grantor can choose any charity as long as it has proper designation as a tax-exempt organization under the Internal Revenue Code.

Whatever amount is not earmarked to go to charity, will come back to the Grantor or a chosen beneficiary, as a stream of income. This amount must be more than 5% but no greater than 50% of the trust’s assets. The payments can be made monthly, quarterly, semiannually, or annually. However, the payments must be made over a fixed timeframe. 

After the expiration of the fixed timeframe, the remainder is distributed to the chosen charitable beneficiaries. 

If the non-charitable income beneficiary dies before the expiration of the trust term, the amount of money in the trust not earmarked for charity will go to non-charitable death beneficiaries. 

Tax Benefits: 

Depending on the length and value of the trust, the Grantor will receive a partial deduction that can offset ordinary income tax and capital gains tax. Essentially, the Grantor will be able to take an immediate tax deduction of up to 60% of their Adjusted Gross Income. 

CRTs can be funded with appreciated assets, which, if sold outside the trust, would result in large capital gains. Funding the CRT with appreciated assets allows the Grantor to benefit from the trust while avoiding costly capital gains. 

The CRT also allows the Grantor to remove the donated assets from his or her estate. This results in avoiding estate and gift taxation. 

Conclusion:  The Charitable Remainder Trust is a great tax avoidance tool. Call the experienced attorneys at McIntyre Elder Law to determine whether one is right for you (704) 259-7040.

Brenton Begley

Attorney at Law