Question: My wife and I are both 80. We have a few stocks that we have held for many years. They are now worth $1,000,000, 10 times what we paid for them. If we sell them, we will have to pay as much as 30% state and federal tax on the capital gains. What do you think of using a CRT?
Answer: Charitable Remainder Trusts (CRTs) have become popular with people who own appreciated assets and would like income from those assets. A CRT is a legal entity that accepts a gift, usually appreciated stocks or real estate, from a donor (you). The trustee of the CRT will sell the gift tax-free and invest the proceeds. You can serve as the trustee and maintain the right to change the designated charitable beneficiary, or you can relinquish that right and let your favorite charity serve as trustee.
The trustee of the CRT will pay you and your spouse an annual income for either a fixed number of years (maximum of 20) or for life. When the trust terminates, the balance of the trust goes to the charity.
The CRT can fulfill six major goals: (1) less investment risk because you diversify your concentrated stock positions, (2) no tax on the sale of the appreciated assets, (3) a substantial gift to charity, (3) increased current income, (4) a significant current tax deduction, and (5) less estate tax when applicable.
As mentioned above, if you want to keep control over the CRT’s assets and beneficiary designations, you can serve as trustee. If you are certain about the charity you want to be the ultimate beneficiary, you can ask them to be trustee and they may pay the set-up costs.
Local non-profit organizations that would be glad to help include the Community Foundation for Monterey County, the Community Hospital of the Monterey Peninsula Foundation (now known as Montage Health), Salinas Valley Memorial Hospital Foundation, the Hospice Foundation, foundations at the Naval Postgraduate School, CSUMB, MIIS, Hartnell , Santa Catalina HS, MPC, York HS, Chartwell HS, the SPCA, Boy Scouts of America, the Girl Scouts, My Museum, and the Monterey Bay Aquarium. (This is not an all-inclusive list.)
Here is an example of how a CRT might work for you:
Your stock, which you are holding as an investment, is considered a capital asset. If you sold it you would be subject to as much as 23.8% federal and 13.3% California tax. If you donate it to the CRT, you can take a current tax deduction that is based upon the present value of the remainder interest (that’s the part that the charity eventually gets), the current fair market value of the stock, and your life expectancy (or number of years until the trust terminates.)
Let’s assume that you and your wife (both 80 years old) donate your $1,000,000 worth of stock with a cost basis of $100,000 to a CRT with a payout rate of 7% per year. You will avoid paying tax on $900,000 of gain, you will receive an immediate charitable income tax deduction of over $500,000, and you will receive income equal to 7% per year of the value of the trust.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to email@example.com.