Charitable Remainder Trust

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What can you do when you own highly appreciated assets and your estate value exceeds the Federal Estate tax equivalent exemption?

January 20, 2007
Author: Cort Christie

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A Unitrust, also called a Charitable Remainder Trust or CRT, allows taxpayers to reduce estate taxes, eliminate capital gains, claim an income tax deduction, and benefit charities.  It also requires that a fixed percentage (minimum 5%) of the annual value of trust assets be paid to the income beneficiary. For example, a CRUT with a value of $2,000,000 and a 5% payout would pay $100,000 to the income beneficiary in that year. If the investment performance for that year was 10% and the value of the trust on the valuation date was $2,200,000 the income beneficiary would receive $110,000 in that year. Another benefit of the CRT is that it will allow for additional contributions. The Unitrust will generally produce higher amounts of income but a smaller tax deduction.

Charities help those who are not as fortunate, and fill a wide variety of niches. Domestic violence… youths… disease… homes for the poor. Endangered species even have their own charities. And believe it or not, charities serve another purpose: they help wealthy Americans reduce their tax bill.

In 1969, the U.S.Congress created a new type of trust that helped charities and not-for-profit organizations generate more revenue for their causes.

A Unitrust is good for someone looking for a specific percentage return. This can be used to keep up with inflation if the trust value continues to grow over the years.

  1. Establish a Charitable Remainder UNITRUST Trust and then transfer your highly appreciated asset(s) into the trust.
  2. The asset(s) are sold without creating a taxable event, increasing the asset’s income potential. The proceeds are now reinvested in investments more appropriate for generating income to the donor(s).
  3. The UNITRSUT pays a fixed (minimum 5%) on the annual trust value. If the trust grows in value, the income will also increase. The principal can also be used to meet minimum payout values.
  4. The Donor receives a Tax deduction based in an IRS formula.
  5. Wealth Replacement: A portion of the income can be used to purchase life insurance policy owned outside of the donor’s esatte in the amount of the gifted asset(s). At the death of the donor(s) the insurance proceeds are received income tax free by the policy beneficiares.
  6. At the death of the donor(s) the remaining assets in the trust are received by the named charity…perhaps a 501(c)(3) charitable organization that you create.

Lets look at an example:

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Dave and Mary Johnson set up a Charitable Reminder Trust with a property they sold for 1.5 Million Dollars. They saved $315,000 in taxes, gained a $270,000 charitable tax deduction and named two local charities and their alma maters as the charitable recipients of their Charitable Remainder Trust. However; the Johnson’s have 3 children and they would like to replace 1 Million of the gifted asset as that represents approximately what they would have received had they inherited the proceeds from the after tax property sale and after estate taxes.

They decide to purchase a Second to Die Life Insurance policy with a 1 Million Dollar Death Benefit. Note that the death benefit from a life insurance policy is paid out 100% income tax free and if structured properly 100% estate tax free as well.

The policy premiums can be paid using a portion of the income generated from the Charitable Remainder trust.

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