Case study: How to spot a prime CRT opportunity
Imagine you sit down with your financial advisor to present an exciting opportunity. You believe a prime tract of land you bought for $200,000 just 10 years ago could now sell for $2 million due to the hot market for new residential development in the area.
Before you suggest putting the property up for sale as soon as possible, consider asking your advisor about a charitable planning tool that could help satisfy your income and charitable giving goals at the same time.
A charitable remainder trust (CRT) is a "split interest" giving vehicle that allows you to transfer an asset (in this case, real estate) to an irrevocable trust, retain an income stream, and earmark what’s left (the "remainder") to pass to the charity or charities of your choice.
For example, in our hypothetical situation, you could establish a designated fund at the community foundation to receive your CRT’s assets following the termination of the income stream. Your fund at the community foundation can then distribute those assets to the charitable organizations you've specified in perpetuity, allowing you to permanently support causes such as hospice, animal rescue, or the art museum.
Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, here’s what happens from a tax perspective:
- When you transfer the property to the CRT at a fair market value of $2 million with a cost basis of $200,000, and then the CRT sells the property, the CRT itself does not pay tax on the $1.8 million capital gain.
- This leaves the full $2 million in the trust to be invested, subject to your retained income stream.
- You are eligible for a charitable tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream.
- Your payments are generally subject to income tax during each year of the distributions, but under more favorable terms than if you had conducted an outright sale.
- Because the CRT is an irrevocable trust, the property and its proceeds (other than what winds up in your estate from the retained income stream) are excluded from your estate for estate tax purposes.
Contrast this with an alternative scenario in which you sell the property, realize a $1.8 million capital gain, pay tax on that gain, and end up with, say, $1.5 million (probably less!) with which to invest, give to charity, and draw from for income. And, in this situation, the proceeds would be included in your estate for estate tax purposes. Ouch!
If you spot a CRT opportunity, give us a call. The team at Akron Community Foundation is happy to work with your advisors to fulfill your charitable wishes, both now and long after you're gone.
To learn more, contact Laura Lederer, senior director of development and advisor relations, at 330-436-5611 or firstname.lastname@example.org. We’re always available to answer your questions about philanthropy or to schedule a personal consultation with you and your professional advisors – all at no cost.
This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.