Charitable Remainder Trusts: They’re Ba-ack!

Charitable Remainder Trus…

The American Taxpayer Relief Act of 2012 (“ATRA”), coupled with the expiration of the 2% Social Security payroll tax reduction, mean increased taxes for most Americans. The increases come primarily in the form of new taxes, higher tax rates, phased-out exemptions and a higher floor on itemized deductions.

As people look for ways to reduce their tax obligations under this new regime, I think we are going to see renewed interest in charitable gifting. Happily, ATRA extended the IRA charitable rollover (benefiting those over age 70 ½) through 2013, and tax watchers predict that it will be extended even further. Other charitable tax-reduction strategies include donor advised funds, charitable gift annuities, outright gifts to charity and, for those with appreciated assets, charitable remainder trusts.

In the past, charitable remainder trusts (“CRT”) were used primarily by charitably-inclined individuals to reduce the size of their estates, thereby reducing exposure to estate tax upon their deaths. Estate-tax avoidance became less of an issue with the increase in the federal estate tax exemption ($5,250,000 in 2013), and CRTs declined in popularity. Now that the capital gains tax rate has been increased from 15% to 20%, however, CRTs may become attractive again as a means of avoiding capital gains tax upon the sale of appreciated assets. (This was always one of the benefits of a CRT, but usually of secondary importance.)


Here’s how it works. An individual “donor” creates a CRT, and then transfers appreciated assets to it. The trust sells the assets, invests the proceeds, and pays the donor an income stream over a period of time and at a payout rate selected by the donor. At the end of the stated period of time, all assets remaining in the trust are distributed to charities selected by the donor.

The tax benefits are significant. First, the donor gets to take an immediate charitable deduction equal to the present value of the charity’s remainder interest. Second, the donor avoids capital gains tax on the sale of the appreciated asset. Third, the value of the appreciated asset is removed from the donor’s estate. Finally, it’s even possible to avoid income tax on the income stream paid out to the donor if the trust receives only tax-exempt income and does not realize any capital gains.

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