A Charitable Remainder Trust Can Be a Highly Effective Tool in Minimizing Burdensome Capital Gains Taxes While Still Providing Income for Beneficiaries
Many people are concerned with tax implications when they begin to plan their estates. Most people would agree that their ultimate goal in planning their estate is to provide for their loved ones in the most efficient and economic manner. This generally includes alleviating the often-burdensome taxes that can be imposed on estates. For those with highly appreciated assets, the tax burden can be quite high when assets are not properly provided for in an estate plan. A Charitable Remainder Trust (“CRT”) is one device can that alleviate these burdensome taxes and produce the best overall return on an asset where the settlor (person creating the trust), beneficiaries and a charity win in the end.
A CRT is appropriate in limited circumstances where assets are highly valued and subject to a capital gains tax if sold.
A CRT, while not appropriate in every circumstance, can provide significant tax benefits when a highly valued and appreciated asset is subject to a capital gains tax if sold. A CRT may also be appropriate when a person’s income is relatively low in comparison to their valued assets. We can help you prevent a high capital gains or estate tax on these assets, by employing a CRT.
A CRT is a tax-exempt irrevocable trust carefully designed to reduce taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time (generally, during the life of the trust settlor) and then, when the stated period of time lapses (this usually occurs at the death of the settlor), donating the remainder of the trust to an IRS-approved designated charity. When the charity sells the asset after it obtains ownership, no capital gains tax is imposed. The IRS allows for a large deduction during the year the asset is donated to charity. This deduction allows for savings in taxes that can be used to buy an insurance policy on the life of the settlor in what is known as “wealth replacement.” A CRT can thus provide income to named beneficiaries, provide for a charitable donation and the settlor can make a sizable return on his appreciated asset(s).
While a CRT does provide many incentives to those with sizable assets, it does have some pitfalls. A CRT may not provide a worthwhile return on an asset if the asset is not large enough in value. Generally, the asset’s value must outweigh the tax burden imposed on the estate if the asset was to be passed to a beneficiary rather than a charity. A CRT is also irrevocable. This means that assets poured into the CRT will be permanently and irrevocably committed to the trust. Because of the permanent nature of a CRT, it is important to discuss all benefits and disadvantages of a CRT with an experienced attorney before committing any assets to a CRT. The attorneys at Alavi & Broyles are experienced in advising clients as to whether a CRT is right for them and assisting them in the creation of a trust that is most beneficial for their estate planning needs.
Max Alavi focuses on assisting clients establish effective and secure vehicles for passing their assets to their loved ones and protecting their families from the uncertainty and expense associated with probate and testamentary guardianship matters. He is also dedicates a significant portion of his practice to complex probate matters, trust administration and litigation of contested trusts.
Max Alavi, Attorney at Law, APC has 6 locations in Orange County and Los Angeles County, California