Get More from your Assets

Do you own an asset that you wished paid more income, yet you don’t want to sell because you’ll face a hefty capital gains tax? For example, maybe you have a piece of raw land or stocks that don’t pay the dividends you are looking for. In such a case, you might be able to convert them into another investment that provides more income while avoiding the capital gains tax. This could be accomplished through a Charitable Remainder Trust (CRT).

Through a CRT, highly appreciated and/or low-income producing assets are transferred to a trust that will pay you an ongoing income for your life or for a specified time period. Here is a basic summary of how it works:

Your attorney draws up the trust;
You transfer assets that have appreciated significantly to the trust but are producing an income that is lower than your current expectations or needs;
The trust sells the asset and pays no capital gains tax;
The trust then reinvests the proceeds in investments that could possibly pay a higher income (e.g., bonds or preferred stock) Please note that investments in preferred stocks and bonds involve risks, including the possible loss of principal invested.

Some people overlook this technique because they believe that they must leave the trust’s entire principal to the charity. That, however, is not always the case. As a practical matter, the present value of the remainder interest to the charity must equal at least 10% of value of the donor’s income interest. This calculation is largely based upon the age of the income beneficiaries, trust duration, value of the contributed assets and the Applicable Federal Rate (AFR) published by the Treasury Department. Although the trust must be irrevocable, the donor can serve as the trustee of the trust, which can allow you some discretion over the trust investments.
Furthermore, the trust can be designed, in some cases, to provide children and grandchildren with some benefits. In some cases, these trusts have been drafted to provide children, grandchildren, and other relatives with the benefits associated with the income interest. In other cases, the income from these trusts has also been used to fund the premiums of a life insurance policy to support the younger relatives at the donor’s death.

In addition to the potentially higher income payments, the donor is usually entitled to an income tax deduction, which is tied to the value of the charities’ remainder interest. Also, when the trust is properly created, the assets remaining in the trust at the end of the donor’s life (or predetermined term of years) can pass to the charity free of federal estate taxes. Of course, certain income limitations and deduction restrictions will often apply to the amount and timing of the income-tax deduction. For this reason, careful planning is required to determine the extent of the donor’s income and estate tax benefits. As these benefits are subject to several federal tax rules, professional assistance from an established estate-planning attorney is highly recommended.