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Charitable remainder trusts (CRTs) permit taxpayers to dispose of highly appreciated assets without incurring capital gains. In such transactions, the taxpayer (grantor) does not sell an appreciated asset him- or herself; instead, the grantor transfers it to a CRT - a tax-exempt entity - which sells it. The amount that would have been paid in taxes - had the grantor sold the asset remains intact as principal and contributes to a higher level of income to the grantor. When the grantor's income interest terminates, the remainder interest passes to a charity or charities named by the grantor.
A CRT's most important benefit is that tax-free sales proceeds can generate more income than tax-diminished sales proceeds. A secondary benefit is that a charitable contribution deduction is generated for income tax purposes when the trust is funded.
CRTs are of particular interest to taxpayers who own highly appreciated assets, to charities and to their respective advisers, including CPAs. This article describes the benefits and operations of such trusts. basis. They are both age 60 and own the building free and clear. Their goal is to generate $250,000 in aftertax income per year. The example assumes a blended federal-state capital gains tax rate of 35% and an ordinary income tax rate of 38%. It also assumes the Paces can invest their sales proceeds and achieve a 10% pretax annual return from the postsale principal.
If the Paces sell the asset themselves, after paying $1,662,500 in federal and state capital gains taxes they will have postsale principal of $3,337,500. This amount will generate $333,750 of annual income, which is subject to $126,825 of income tax each year. Their annual aftertax income is only $206,925.
If, instead, the Paces transfer their property to a charitable remainder unitrust and retain a 10% income interest for life, they will achieve their income objective. Since the CRT pays no tax on the sale, it has postsale principal of $5 million to invest for the Paces' benefit. On the basis of the same 10% yield, they will receive $500,000 per year pretax, or $310,000 aftertax.