Charitable Remainder Trusts

Many of you know me on these boards and realize that I work in the financial services industry. As my current market is more interested in acquiring an estate, I haven't had to delve into actual estate planning yet. Recently I was broached by a colleague of mine about doing Charitable Remainder Trusts. Essentially (if I understand this correctly) it is a way to avoid capital gains taxes. Let me outline a sample situation and anyone that is knowledgeable in this field I would appreciate corrections or input.

As an example, lets say that you acquired a certain commercial piece of property/business or stock for $200,000. Twenty years later, that property has appreciated to $1000,000 and you are wanting to retire and sell. Unfortunately, if you merely SELL the establishment, you would be slammed with capital gains on $800,000 and pay $120,000 in taxes. A viable alternative is supposed to be a Charitable Remainder Trust (CRT). Essentially with a CRT you can set one up and GIVE your business to the Trust. Obviously this would give you an initial deduction on your taxes, but the benefits continue. With the CRT, you name maybe 20% of the assets (at a minimum) as irrevocable beneficiaries to qualified charities. The CRT now SELLS the business and the complete $1000,000 stays in the trust. Now that the trust is set up, it purchases a life insurance contract for the amount of the trust to go to the seller's heirs. This frees up the remaining $800,000 to be drawn by you at any amount over the course of your life time. Anything left will go to the charities, but 20% MUST go to charities. I'm not sure how the growth inside the trust is taxed and I'm unsure as to how the income is taxed (I think it probably depends).

Does anyone know anything more about these? Is this too simplistic of a view and are there things that I am NOT taking into consideration? If someone could shed some light on these or point me to a link, I would be appreciative. I haven't done hardly any research yet; I just learned about them here recently and thought I would give you all first dibs on helping me.

Thanks,

-Joe

CRTs are a very effective way of avoiding capital gains taxes. There is only a 10% remainder required to pass to the charity.

If the property is worth $1M, then $100K needs to be left as a remainder. The catch is the present value of that future gift must be $100K, so the gift to charity will end up being higher. When you do your estate planning, the IRS will publish tables every quarter with the discount to be used for determining the present value of the future gift. It will be based on your current age and life expectancy.

Your tax deduction will equal the value of the future gift and can be used all at once or carried over for five years.

For income, required minimum annual distribution is 5% and maximum is 50%. Some people choose to take a larger lump sum in the beginning and offset that income with the full deduction upfront. It is possible to take your 5% every year and if you outlive the actuarial table, you will get an even better deal. If you die too soon, the charity simply gets more money. A much better option than giving it to the government in my opinion.

As far as insurance goes, many people use the tax savings to fund a "wealth replacement trust" which is basically a life insurance policy that is meant to replace the loss of the asset to your family. If the policy is place in a irreveocable life insurance trust it will be removed from your estate as well.

There you have it- current tax deductions, charitable giving, lifetime income and zero estate taxes while still leaving the full amount to your family. It can be a very powerful tool. Make sure you find excellent advice because the technical nature of CRTs leave no room for error.

Pacific Advisors in Claremont, CA are the best in the business... not affiliated with me in any way but I attended a tax and estate planning seminar they sponsored. They are definitely worth talking to.

Good Luck!