By Kevin FitzGerald
I’m 73 years old and I’ve been holding some stocks for over 40 years. These have gone up a lot and have split many times. Also my wife and I have a second home that we bought many years ago and has also gone way up in value. I’d like to sell but I’m worried about a big tax bill. Do you have any ideas? — S.M., Yonkers
If you’re like many investors today, you may own appreciated assets, such as stock or real estate, that you are reluctant to sell because of the significant capital-gains taxes you would owe. At the same time, you may be looking to increase your cash flow or diversify your holdings. That would mean selling those valuable assets, paying the applicable taxes and reinvesting at less than the asset’s full value. Fortunately, there is a solution to this investment dilemma — the Charitable Remainder Trust.
What is a Charitable Remainder Trust?
A CRT is an irrevocable trust that is designed to convert an investor’s highly appreciated assets into a lifetime income stream without generating estate and immediate capital gains taxes. CRTs have become very popular in recent years because they not only represent a valuable tax-advantaged investment, but also enable you to provide a gift to one or more charities that have special meaning to you. By establishing a CRT, you can:
€ eliminate immediate capital gains taxes on the sale of appreciated assets, such as stocks, bonds, real estate and other taxes;
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€ reduce estate taxes of up to 55 percent that your heirs might have to pay upon your death;
€ reduce current income taxes;
€ increase spendable income throughout your lifetime;
€ make a significant future charitable gift;
€ receive the benefits of tax-free compounding;
€ avoid probate;
€ maximize the assets your family will receive after your death.
How does a CRT work?
When you establish a CRT, you or another beneficiary, such as your spouse or another family member, receive income from the trust for life or for a term of up to 20 years. When the trust ends, the remaining assets pass to the qualified charity or charities of your choice. Here’s how it works:
€ You irrevocably transfer cash, securities or other property you own into a CRT. As a result of this transfer, you lower the taxable value of our estate and provide significant estate tax savings to your heirs.
€ You select the type of CRT based on your individual needs. There are two types — an Annuity Trust and a Unit-trust. The type of trust you select will determine how much income you receive from the CRT.
You receive an immediate charitable income-tax deduction based on (1) your age or the ages of those named as income beneficiaries, (2) the distribution rate chosen, and (3) the value of the assets put into the trust. (Any excess deduction may be carried over for up to five additional years.)
If the assets are sold within the CRT, the trust pays no immediate capital gains tax since a CRT is considered a tax-exempt entity.
€ At the termination of the trust, the trust assets will be distributed to the qualified charity or charities you have selected. (You have the ability to change the charity or charities at any time during the life of the trust.)
Types of CRTs
Annuity Trust — If you choose this option, you will receive annual fixed payments. The amount you receive would be equal to a fixed percentage, which must equal at least 5 percent of the initial fair market value of the assets in the trust. Once an Annuity Trust is created, you cannot add to it.
Unit trust — If you choose this option, you will receive variable payments. In this case, you would receive lifetime payments based on the value of your assets in the trust. Your payments would be equal to a percentage of the value of the trust as it is revalued each year and must be at least 5 percent. Unlike the Annuity Trust, you may make additional contributions to a Unit trust after it is created.
If you’d like more information about the benefits of adding a CRT to your estate plan, contact your financial advisor. He or she can work with your legal and tax advisers to help you determine how the CRT — and other trust alternatives, including Living Trusts and Irrevocable Life Insurance Trusts — can best meet your wealth preservation planning needs.
The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Kevin FitzGerald is first vice president-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 423-3381.