It seems that Charitable Remainder Trusts have been
off the planning radar for awhile. Here is a case study
that illustrates why they are making a comeback:
After working for years to build up his company, Dave and
his wife have decided that it is time to retire. Without
children to take over the business, Dave has decided to
Fortunately, the business is attractive in
the market and Dave has several buyers interested in
purchasing for an amount close to $5M. Dave’s tax advisor,
however, told him that he would pay a little over $1M in
income taxes when the business sold.
Dave hoped to
find a way to reduce or eliminate that tax, so he called
together his team of financial and legal advisors. After
some discussion, Dave and his team concluded that he would
be a good candidate for a special trust called a
charitable remainder trust (CRT).
Dave started by
contributing his business interests to the trust, with the
trustee of the trust completing the sale to the winning
bidder. Since the CRT is considered a tax exempt entity,
no tax will be due on the sale. This means that the trust
would have the full $5M in sales proceeds to invest,
rather than the $4M Dave would have had if he sold the
Once the sale takes place, the
trust will invest the sale proceeds and begin to pay an
income stream to Dave for the rest of his life. Dave asked
his team to design the trust to continue the income stream
to his wife Linda if he died before she did.
Linda really liked the idea of a steady source of cash
flow. The trust was to provide them with a 5% annuity
(about $250,000 per year) for the rest of both their
lives. Even after paying an annual income tax on that cash
flow, Dave and Linda could expect the trust to provide
them with much more than the $125,000 a year that they
needed to live on.
In addition to the regular cash
flow, the trust also provided them with the opportunity to
make a charitable statement. The way the trust was
designed, after Dave and Linda died, the balance of the
assets in the trust would go to their favorite charity,
the local Boys and Girls Club. Dave had been very involved
with the club, not only as a donor but also as a coach and
board member. He had seen many times the difference that
the club made in the lives of young boys and girls, and he
wanted to continue to help the club long after he and
Linda were gone.
There are several different types of
charitable remainder trusts available, including
charitable annuity trusts, unitrusts, “flip” trusts, and
“net income make-up” trusts. Each type of trust is
designed to meet a particular type of situation and
You can contribute many different types
of assets to a CRT including businesses, real estate,
stocks, collectibles, and even works of art. Each asset
type has rules that affect tax deductibility, but there
are reasons why each could make a good asset to contribute
to a CRT.
In this case, Dave and his wife Linda have
been thrilled with the trust. It provided them with a nice
tax deduction up front, tax deferral, and steady income.
Maybe most importantly, it provides Dave with a meaningful
to way to support the Boys and Girls Club after he's gone.
If you have questions,
here to have our office call to set up a time to
discuss this with you.
To return to the newsletter go back to your email