Charitable Remainder Trust
Thanks to the growth in our economy over the past two to three decades, many individuals and families find themselves reaping the
rewards of astute investment decisions made a number of years ago.
For example, Mr. and Mrs. Sample bought a piece of development land a little more than a decade ago. Growth in the area has caused
the value of their land to increase from the original purchase price of $50,000 to a fair market value of $200,000. Now the Samples would
like to sell the land and reinvest the proceeds in a way that will generate retirement income.
However, the shrinkage caused by the capital gains tax-a tax on the growth of the original investment-drastically reduces the
attractiveness of selling the land.
The Tax-Free Sale Plan
The Tax-Free Sale is tailor-made for individuals who find themselves in this situation. It is a plan built around the use of a versatile
financial planning tool known as a Charitable Remainder Trust (CRT). The CRT simply takes advantage of the long-standing provisions of our tax
law that encourage the support of qualified charitable organizations.
The CRT has three significant benefits:
- Bypass of capital gains tax
- A charitable income tax deduction
- A lifetime income stream
The illustration shows how the CRT makes it possible for the Samples to sell the property tax-free, receive some much needed cash for the
first phase of their retirement, and benefit from an increased income stream for the rest of their lives.
First, Mr. and Mrs. Sample transfer a portion of the property into a CRT. As the name suggests, the CRT is charitable in nature. As a result,
the Samples receive a charitable income tax deduction for the value transferred to the CRT. The couple retains ownership in the portion of the property
not transferred to the CRT.
When the property is sold, the CRT bypasses 100% of the capital gains tax on the portion of the land it owns. While the Samples do owe capital
gains tax for the gain attributable to the portion they retain, this gain is offset by the charitable income tax deduction they receive for the gift to the CRT.
As a result, Mr. and Mrs. Sample receive the full proceeds from the sale of their portion of the property.
What about that additional income for retirement? By agreement, the CRT will make annual payments equal to 6% of the value of the trust. In our example,
this is equal to $6,534 the first year. Even more impressive, the estimated annual payments will total more than $209,288 over the couple's life expectancy!
For many who, ten to twenty years ago, were making investments with a keen eye on future objectives, the future is suddenly here. Even in the wake of recent
economic ups-and-downs, it is not at all unusual for investments made a number of years ago to have significantly increased in value.
At the same time, these investments frequently produce little or no actual income. So now it is time to sell the assets and enjoy the fruits of a wise investment!
There's only one problem. Few planned to watch the value of an asset shrink due to the capital gain tax triggered by a sale. If you find yourself in this
position, you are going to like the benefits of the Tax-Free Sale.
The Tax-Free Sale plan is just one of many strategies that takes advantage of tax laws developed to encourage and reward the spirit of philanthropy. If you
would like to receive personalized information on how charitable planning can help you realize your goals, we invite you to contact us at (800) 449-5454 or click
on the link below.
(This is not professional legal or tax advice; consult a tax advisor about your specific situation.)
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