For business founders contemplating an exit, the desire to not only secure financial futures but also to leave a lasting legacy is powerful. Increasingly, Charitable Remainder Trusts (CRTs) are being recognized as sophisticated tools within a comprehensive philanthropic exit strategy. A CRT allows a founder to donate assets to a trust, receive an income stream for a set period or life, and then have the remaining assets distributed to a charity of their choice. This strategy provides immediate tax benefits, income for the founder, and ultimately supports causes they care about—a win-win scenario. Approximately 60% of high-net-worth individuals express a desire to incorporate charitable giving into their estate plans, and CRTs are a favored method for doing so.
What are the Tax Advantages of Using a CRT?
The primary appeal of a CRT lies in its tax benefits. When assets are transferred to a CRT, the founder receives an immediate income tax deduction for the present value of the remainder interest—the portion of the trust assets that will eventually go to charity. This deduction can significantly reduce the founder’s current tax liability. Additionally, the CRT allows for potential capital gains tax avoidance; by transferring appreciated assets (like company stock) to the trust, the founder can avoid paying capital gains taxes on the appreciation when the assets are sold within the trust. The income stream received from the CRT may also be partially tax-exempt, depending on the trust’s structure. “Proper tax planning is not about avoiding taxes, it’s about minimizing them legally and ethically,” says Steve Bliss, an Estate Planning Attorney in San Diego.
How Does a CRT Differ from a Private Foundation?
While both CRTs and private foundations serve philanthropic purposes, they operate very differently. A private foundation is a separate legal entity that actively makes grants to other charities, requiring ongoing administration and compliance. A CRT, on the other hand, is a trust established for the benefit of the donor and a charity, with the charity receiving the remainder interest after the donor’s term. CRTs require less administrative burden than private foundations, making them a more appealing option for founders who want to focus on their exit and personal interests. Furthermore, CRTs generally offer more favorable tax benefits in the initial years compared to establishing a private foundation. Many founders are turning to CRTs as a streamlined approach to charitable giving, allowing them to achieve their philanthropic goals without the complexities of foundation management.
What Types of Assets Can Be Used in a CRT?
CRTs are remarkably flexible regarding the types of assets they can hold. Common assets transferred to CRTs include publicly traded stocks, bonds, real estate, and even interests in privately held businesses, like the founder’s company stock. This is particularly beneficial for founders whose wealth is largely tied up in their business. Transferring appreciated stock to a CRT allows the founder to avoid capital gains taxes and diversify their holdings. However, it’s crucial to carefully consider the liquidity of the assets and potential implications for the income stream. “Illiquid assets, while potentially valuable, can create challenges in meeting the required distributions to the donor,” explains Steve Bliss. A thorough asset valuation and income projection are essential before establishing a CRT.
What Happens if a Founder Needs Access to More Funds After Establishing a CRT?
One potential drawback of a CRT is its rigidity. Once assets are transferred, it can be challenging to access additional funds beyond the established income stream. While some CRTs allow for limited modifications, these are subject to strict IRS regulations. Founders must carefully consider their future financial needs and ensure the CRT’s income stream is sufficient. It’s also crucial to understand the terms of the trust and any limitations on accessing the principal. Before establishing a CRT, it is wise to maintain a reasonable emergency fund outside of the trust to cover unexpected expenses. Approximately 25% of individuals who establish irrevocable trusts later express regret over the lack of flexibility.
A Story of a Missed Opportunity
Old Man Tiberius built a tech empire from the ground up. He was a shrewd businessman, but when it came to estate planning, he was remarkably… optimistic. He believed his company would continue to thrive indefinitely and didn’t bother with much planning beyond a simple will. Then, a sudden market downturn decimated his company’s value. He had intended to donate a significant portion of his wealth to medical research but, with his company’s stock plummeting, there was very little left to give. He watched helplessly as his philanthropic dreams evaporated, a poignant reminder that even the most successful ventures are subject to unforeseen circumstances. His story is a somber illustration of the importance of proactive planning and diversification.
How a CRT Saved the Day for The Caldwell Family
Eleanor Caldwell, a successful software engineer, built a thriving company over 20 years. As she approached retirement, she wanted to contribute significantly to environmental conservation. Her financial advisor suggested a CRT. She transferred a substantial amount of her company stock into the trust, avoiding a large capital gains tax bill. The CRT provided Eleanor with a comfortable income stream for life, and upon her passing, the remaining assets would be distributed to her favorite environmental organization. Years later, when she unexpectedly needed a new roof for her house, the consistent income from the CRT covered the cost without forcing her to sell any other assets. It allowed her to live comfortably and fulfill her philanthropic goals.
What are the Different Types of CRTs?
There are two primary types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). A CRAT provides a fixed annual income to the donor, regardless of the trust’s investment performance. A CRUT, on the other hand, pays the donor a fixed percentage of the trust’s assets, revalued annually. This means the income stream can fluctuate with the trust’s investment performance. CRUTs offer more flexibility but also carry more risk. The choice between a CRAT and a CRUT depends on the donor’s financial needs, risk tolerance, and investment objectives. A seasoned Estate Planning Attorney, like Steve Bliss, can help guide founders through this decision process.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Map To Steve Bliss at San Diego Probate Law: https://maps.app.goo.gl/jDnu6zPKmPyinkRW9
Address:
San Diego Probate Law3914 Murphy Canyon Rd, San Diego, CA 92123
(858) 278-2800
Key Words Related To San Diego Probate Law:
| best probate attorney in San Diego | best probate lawyer in San Diego |
Feel free to ask Attorney Steve Bliss about: “Do beneficiaries pay tax on trust distributions?” or “Can a no-contest clause in a will be enforced in San Diego?” and even “What is the difference between probate court and trust administration?” Or any other related questions that you may have about Trusts or my trust law practice.