TAX TIP: CHARITABLE REMAINDER TRUSTS
In 1969, the U.S. Congress created
a charitable remainder trust (CRT)
to assist charities and not-for-profit organizations in generating
more revenue. In the past decade, this
trust has been steadily gaining in
popularity. This vehicle allows taxpayers to reduce estate taxes,
eliminate capital gains, claim
an income tax deduction, and benefit
charities instead of the IRS.
Specifically, a CRT is a tax-savings
tool that business owners can utilize
to reduce their capital gains and state income tax. In addition,
the charitable remainder trust
is one of the most efficient estate
planning tools available to anyone holding assets that have experienced
significant appreciation like
stocks, real estate, a business, etc.
The taxes on the sale of the stock of a business can be daunting:
20 percent federal capital gains
tax (28 percent if you qualify for
alternative minimum tax) and 9.5 percent state income tax (rate
depends on the state). If an owner
sells the corporate assets first, then
distributes the proceeds, he is subject to a double tax.
For instance, suppose you sell one
of your businesses for $1 million.
Let's assume you originally paid $100,000 for the company. Upon completion
of the sale, you could
owe capital gains taxes on the $900,000
difference. The tax could easily top $250,000 or more, depending
on the type of sale and overall
tax situation.
Funding a CRT with highly appreciated
assets (like a business) allows one
to sell those assets without paying any capital gains taxes. Since
CRTs have a charitable intent,
the full value of any assets transferred
to the trust creates a tax deduction for the donor.
Once the CRT is created, it distributes
income to the donor based on a percentage
that the owner chooses and the amount
of income generated by the assets while inside the
CRT. The IRS states that, at a minimum,
the CRT must distribute at least 5
percent of the net fair market value of its assets. If the
seller doesn’t need the income one year, he or she may elect
to defer income through a "makeup provision." However,
the CRT's net distributions must eventually
equal 5 percent to be considered valid by the IRS.
When setting the payout percentage,
be forewarned: the higher it is, the
lower your charitable income tax deduction. Consider market conditions
and the possibility that
taking out too much may reduce the
principal inside the trust.
A charitable remainder trust is an
attractive planning tool for the disposal
of highly appreciated assets. While at death the assets are distributed
to the charity rather than
the heirs of the estate, the use of
an irrevocable life insurance trust in conjunction with a CRT could
replace the asset's value for
the heirs estate tax free.
Speak with your financial planner and
tax professional for additional information
on the pros and cons for your specific situation.
Mark Gould, C.B.I., C.B.O.A., President of Gould Business Group and Vercor Principal, provides middle market companies (annual revenues of $2 to $50 million) with a systematic approach to mergers and acquisitions. Mark also has extensive experience in business ownership including industries such as medical distribution, printing, manufacturing, professional services, and food related businesses.
Copyright © 2003
by Mark Gould
All rights reserved
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