Meurer Law Offices, Denver, Colorado
With help from the Meurer Law Offices in Denver, a Charitable Remainder Trust (CRT) can be formed, allowing you to convert highly appreciated assets, such as stocks or investments in real estate, into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes and enables you to benefit a charity that has a special meaning to you.
With a CRT, you first transfer an asset into an Irrevocable Trust, removing it from your estate for estate tax purposes. You also get an immediate charitable income tax deduction which reduces your income taxes. The trust then sells the asset at market value, paying no capital gains tax and reinvests the funds into income producing assets. For the rest of your life, the trust now pays income. Since the principal has not been reduced by capital gains tax, you will receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.
While a CRT is an Irrevocable Trust, you and your spouse may change the Charitable Beneficiaries. Under certain conditions, you may even serve as trustees and maintain full investment control of CRT assets.
Your Charitable Remainder Trust & Capital Gains Taxes
Because assets are destined for a charity, a CRT does not pay capital gains taxes, which can range from 10%-20% of an asset’s growth and value. Thus CRTs are ideal for highly appreciated assets. For example:
- Suppose you sell a rental property for $1 million when you originally paid $100,000
- Upon completion of the sale, you would owe capital gains taxes on $900,000
- Given a 15% tax rate, the capital gains tax owed would be $150,000
Since CRTs have a charitable intent, capital gains tax is ZERO and transfers the full value into the trust.
Your Charitable Remainder Trust & Income Received
The amount of income to come out of the CRT depends on the payor percentage that you choose and the amount of income your assets generate while inside the CRT.
The IRS states that at a minimum the CRT must distribute at least 5% of the net fair market value of the assets. If you do not need the income one year, a makeup provision will ensure you meet this minimum. On the other hand, the higher the income the lower your charitable income deduction. To avoid taking out too much and reducing the principal, we don’t recommend receiving more than 10% each year.
Your Charitable Remainder Trust & Distribution to Heirs
CRTs are designed to give the principal to charities when you and your spouse pass away. By bypassing your children, it’s possible that they will feel slighted. If this is a concern, our attorneys at the Meurer Law Offices can combine the CRT with another strategy, which can involve using the income to purchase life insurances as a tool to make up the difference.
Some large estates combine the CRT with a separate trust to provide cash distribution upon the death of the owner. This trust then subdivides into individual trusts for each named heir upon your death. In this scenario, everyone wins. The estate owner receives an income stream and tax deductions. The charity gets the principal of the CRT, and the children receive a cash distribution.
As you can see, there are a number of advantages and details to consider when establishing a Charitable Remainder Trust. By working with the Meurer Law Offices in Denver, we’ll make sure you understand exactly what it entails, how it operates and what happens after your death. And if you decide to move forward with a CRT, we’ll streamline the paperwork and ensure everything is in perfect order.
Call or contact our offices today to schedule your free consultation: 303-991-3544