Tax Advantages of a Charitable Remainder Trust

Tax Advantages of a Charitable Remainder Trust

| February 05, 2024

The Charitable Remainder Trust (CRT) is a very powerful Estate Planning tool which can give someone that has a high net worth some valuable tax deductions, provide income for them, and eventually provide a gift to a charity of their choice.  So here is how it works. 

A CRT is an irrevocable trust, typically funded with highly appreciated assets or property.  It is structured so that there is a current beneficiary, who is either the donor or a named individual, and a remainder beneficiary, which is a qualified charity.  You can donate assets to this irrevocable trust and the named current beneficiary of the trust, often yourself or your spouse, can receive a certain amount of income each year or over the course of your lives.  After that term, the remainder of the assets in the trust go to a qualified charity. 

There are a few powerful tax benefits. Upon placing the assets into the trust, you get an immediate partial income tax deduction.  This deduction is based off the value of the gift, minus the total income that you are expected to receive from this over your life.  The total income calculation is based on your life expectancy, interest rates, and how your trust document is set up.

The next tax advantage is that you avoid owing capital gains taxes on the sale of the property or asset once it’s in the trust.  That’s why people usually put highly appreciated assets into the trust. For example, let’s say you had assets that had a lot of gains and you just sold them.  You’d then have to pay capital gains taxes on a large gain, leaving you a lesser amount to take income from.

But guess what?  If you put those assets into the Charitable Remainder Trust and the charity sells those assets there, is no capital gains taxes to be paid, because a charity doesn’t pay taxes. 

So that means you have the full value of the asset after it’s sold vs. a reduced amount to take income from, thus, providing you with a higher amount of income each year for the rest of your life. That means the donor can potentially diversify out of a concentrated position in a tax efficient manner.  You get more income, and the Charity gets a larger amount.

Lastly, a contribution to a CRT can produce an estate tax deduction.  After you pass, in our example, the remaining money that is left in the CRT will go to the charity and will remain outside of your estate, so it’s not subject to death taxes that would normally be assessed if your estate is above a certain size.

To sum it up, with the CRT, you get income tax deductions, capital gains tax elimination, and potential Estate Tax deductions.  And the charity gets a donation as well. That’s a win-win scenario.

Disclosure Advisory services are provided by Apollon Wealth Management, LLC (“Apollon”), an investment adviser registered with the Securities and Exchange Commission. Piershale Financial Group is a DBA of Apollon. The information in this message is for the intended recipient[s] only. Please visit our website www.apollonwealthmanagement.com for important disclosures