Charitable Remainder Trusts

Charitable Remainder Trusts

It seems that Charitable Remainder Trusts have been off the planning radar for awhile. Here is a case study that illustrates why they are making a comeback:

After working for years to build up his company, Dave and his wife have decided that it is time to retire. Without children to take over the business, Dave has decided to sell.

Fortunately, the business is attractive in the market and Dave has several buyers interested in purchasing for an amount close to $5M. Dave’s tax advisor, however, told him that he would pay a little over $1M in income taxes when the business sold.

Dave hoped to find a way to reduce or eliminate that tax, so he called together his team of financial and legal advisors. After some discussion, Dave and his team concluded that he would be a good candidate for a special trust called a charitable remainder trust (CRT).

Dave started by contributing his business interests to the trust, with the trustee of the trust completing the sale to the winning bidder. Since the CRT is considered a tax exempt entity, no tax will be due on the sale. This means that the trust would have the full $5M in sales proceeds to invest, rather than the $4M Dave would have had if he sold the business outright.

Once the sale takes place, the trust will invest the sale proceeds and begin to pay an income stream to Dave for the rest of his life. Dave asked his team to design the trust to continue the income stream to his wife Linda if he died before she did.

Dave and Linda really liked the idea of a steady source of cash flow. The trust was to provide them with a 5% annuity (about $250,000 per year) for the rest of both their lives. Even after paying an annual income tax on that cash flow, Dave and Linda could expect the trust to provide them with much more than the $125,000 a year that they needed to live on.

In addition to the regular cash flow, the trust also provided them with the opportunity to make a charitable statement. The way the trust was designed, after Dave and Linda died, the balance of the assets in the trust would go to their favorite charity, the local Boys and Girls Club. Dave had been very involved with the club, not only as a donor but also as a coach and board member. He had seen many times the difference that the club made in the lives of young boys and girls, and he wanted to continue to help the club long after he and Linda were gone.

There are several different types of charitable remainder trusts available, including charitable annuity trusts, unitrusts, “flip” trusts, and “net income make-up” trusts. Each type of trust is designed to meet a particular type of situation and circumstances.

You can contribute many different types of assets to a CRT including businesses, real estate, stocks, collectibles, and even works of art. Each asset type has rules that affect tax deductibility, but there are reasons why each could make a good asset to contribute to a CRT.

In this case, Dave and his wife Linda have been thrilled with the trust. It provided them with a nice tax deduction up front, tax deferral, and steady income. Maybe most importantly, it provides Dave with a meaningful to way to support the Boys and Girls Club after he’s gone.

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