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Tax advantages of a charitable remainder trust

by | Jun 1, 2021 | Estate Planning

If you have highly appreciated assets that generate minimal income, you may want to consider investing in a charitable remainder trust. 

With this type of irrevocable trust, you may make a substantial gift to a qualified charitable organization while retaining interest in the income the trust generates during your lifetime. Upon your death, assets in the trust transfer to the organization. 

In addition to generating cash flow, a CRT may offer several tax advantages. 

Receive an immediate income tax deduction

When you fund a CRT, you may be able to take an immediate charitable income deduction on the present value of the assets that will eventually transfer to the designated organization. The calculated interest the CRT will generate during your lifetime may determine the deduction amount. 

Avoid capital gains tax on appreciated assets

If you have substantially appreciated assets, you may be able to preserve their value by contributing the property to a CRT. A charitable trust may then sell the assets without paying capital gains tax, allowing you to fully reinvest your property while increasing your income and the size of your contribution to the organization. 

Minimize estate tax liability

Contributing an asset to a CRT effectively removes it from your estate. While the IRS may include trust property as part of your gross estate after your death, your estate may take a charitable deduction in the amount of the property’s fair market value. 

In addition to these tax benefits, you may be able to leverage the cash flow a CRT generates to fund other estate planning strategies, such as wealth replacement, which may allow you to contribute a substantial legacy to charity without excluding your heirs.