Fiduciary Trust International

Investors who own appreciated properties often find themselves reluctant to sell them, preferring not to incur the capital gains taxes such transactions would generate. To address this problem, some property owners have considered giving these assets away to a charitable remainder trust. The trustee of that trust may sell those assets with no capital gains tax, yet the investor may continue to retain benefits from the gifted property.

Trusts generally create two separate legal interests: the current beneficiary, who is entitled to enjoy the stream of payments from the trust during its existence, and the remainderman, who is entitled to receive the property upon the trusts termination. You or any individual you select can be the current beneficiary and one or more charitable organizations must be the remaindermen. The current beneficiary receives an annual amount that may be:

• an annuity, often based on a fixed percentage of the trust propertys initial fair market value;
• a unitrust amount, defined as a fixed percentage of the trusts fair market value each year; or
• the lesser of net income or a unitrust.The lower the annuity or unitrust percentage, the greater the tax advantages. However, the minimum percentage or annuity amount is 5% (with a maximum unitrust percentage of 50%).
  

How Capital Gains Tax Applies

Lets assume for a moment that you have transferred your appreciated property to a charitable remainder trust, and that the trustee has sold the property and then invested the proceeds in a diversified portfolio. Since the remainderman is a charity, no capital gains tax is due on the gain realized by that sale.

Each payment to you or your beneficiary will be subject to income tax to the extent of the taxable income generated by the trust in a given year. If the payment exceeds the trusts taxable income, that excess may be taxed to you or your beneficiary as capital gains. Because capital gains are taxed at a lower rate than ordinary income, a strategy emphasizing total return, rather than mere production of income, maximizes a beneficiaries after tax income.
 
Income Tax

Creating a charitable remainder trust also entitles you to a charitable deduction on your income tax for the year in which the property is given to the trust. This deduction may be based on the properties appreciated value and is equal to the value of the charities remainder interest in that property, according to the U.S. Treasuries mortality and annuity or unitrust tables. The older the current beneficiary, the more valuable your income tax deduction may be. Your deduction will also be subject to the usual charitable deduction percentage limitations. (Sample unitrust income tax deductions are represented in the chart above.)

Gift Tax

Because your proposed gift to the charitable remainder trust would be a completed gift, you may be subject to gift tax, depending on who the current beneficiary is. If it is you or your spouse, for example, there should be no gift tax. However, if the current beneficiary is someone other than you or your spouse, there may be some gift tax consequences. In any event, the amount of the charitys remainder interest will qualify for a gift tax charitable deduction equal to the income tax deduction.

Estate Tax

Charitable remainder trusts are generally not subject to estate tax. However, there are limited situations in which an estate tax may apply.

Conclusion

A charitable remainder trust is irrevocable and its property ultimately passes to charity instead of to family members. Therefore, it is logically a tactic best suited to charitably inclined individuals. Some families use life insurance trusts to replenish the property that would otherwise have passed to their heirs.

Your lawyer or other professional advisor is, of course, in the best position to determine whether such a strategy is appropriate for you and should be consulted to design a structure to achieve maximum overall tax savings.

Get in Touch