Charitable Remainder Trusts Santa Clara County, cA.
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State: California Trust Lawyers
Serving Cities Nearby: Los Altos Hills, Monte Sereno, Los Altos, San Jose, Sunnyvale, Santa Clara, Mountain View, Milipitas, Palo Alto and surrounding cities.
What is a Charitable Remainder Trust
Are you a charitable person? Do you want your children to get a higher and steady income from your assets after you rest in peace? A Charitable Remainder Trust helps you accomplish both of these goals at the same time. You channel your cash or assets into a CRT (for a charity you are passionate about). The assets then become a lifetime income for you or your children and eventually a named charity. Apart from increasing revenue streams, CRT eliminates estate taxes and qualifies you for income tax deductions.
Charitable Remainder Trust Example
Steve and Liz Hauser (both 62 years of age) own a vacation home in Atlanta. They appreciate having a place to vacation and share with friends now and then. However, maintenance costs are high. The house has a fair market value of $700,000 and is debt-free.
The Hausers have thought about selling the property to benefit from the income and avoid all maintenance costs.
The Hausers’ basis in the home is $200,000. If they sell the house, they will gain $500,000 and (value less cost) of which they would have to pay 20% of capital gains income (since the home wasn’t their primary residence, they don’t qualify for an exemption). That leaves them with $400,000.
Suppose they were to reinvest the amount in a money market fund with a guaranteed 5% return. They can expect an annual income of $20,000. If we use 100 as life expectancy, the total lifetime income from the investment (before taxes) would be $760,000. Apart from worrying about taxes, their investment would stay vulnerable to creditors and litigators.
What if they use a CRT?
If Steve and Liz transfer the home to a CRT, the Hauser’s can save up $175,000.00 (35% income tax bracket) on their income tax with charitable income tax deduction.
The trustee can sell the home in Santa Clara County, for example, for the same amount, but since the Trust is exempt from the capital gains tax, the whole $500,000 would be available to reinvest. The 5% return would yield $25,000 annually before taxes with a total of $950,000 on their hundredth birthday. That means they get $190,000 more income, plus asset protection from creditors and lawsuits.
Convert Appreciating Assets into Income
A charitable remainder trust is used to convert an appreciating asset, including real estate and stocks, into a lifetime income. The immediate benefit is a reduction in your income tax at the point when you transfer the asset to a charitable trust.
Also, you’ll pay no capital gains taxes when the asset is sold. You will pay no estate taxes when you breathe your last, and the wealth is passed to your charitable beneficiary.
The CRT is an irrevocable trust, a technicality that keeps its safe from the taxman, creditors, and litigators. When you put your home into a CRT, like the Hausers, that home is no longer considered part of your estate, so you cannot pay taxes on it. It cannot be repossessed or targeted by creditors, and if a dog bites someone on that same property, no personal injury lawsuits can be filed against you.
Following the transfer of the asset to the CRT, the trustee sells it at current market value with full exemption from capital gains tax (charities are exempt from CGT if the transaction accrues to a donation). They then reinvest the amount into high income-producing assets.
The Trust will pay you an income for the rest of your life. After you die, the rest goes to your chosen charity, hence the name Charitable Remainder Trust.
Stretch IRA for Your Heirs and Beneficiaries
Now, consider that you want to set your children up for life for when you die. If you named them directly as the beneficiary of your Individual Retirement Account, the persons could waste the money, spend it too quickly or malinvest it.
In that case, you can name a CRT as the beneficiary of your IRA. It works in the same case as real estate or stock. After you pass, the Trust takes over and converts your retirement funds into income-generating assets. The Trust then pays your children a monthly or annual income for the rest of their life. When they pass, the remainder goes to a charity of your choice.
The Mechanics of CRT
There are two types of Charitable Remainder Trusts, unitrusts and annuity trusts, and they both operate on the same basic principles:
· It’s an irrevocable trust that removes the assets from your direct ownership
· The year when you make the asset transfer to the CRT, you can claim charitable deductions on your income tax
· When you put an asset into a CRT, you or another person that you name receive a steady lifetime income from it
· At the end of the trust term, the remainder goes to a charity or charities that you choose
The difference is in the formula of income distribution:
With a Charitable Remainder Annuity Trust, you choose to receive a CRT’s fixed income. That implies that regardless of how the Trust performs after you transfer your asset, your monthly or yearly income won’t change.
With a Charitable Remainder Unitrust, you receive a percentage of the trust assets, like the Hausers. The amount of your yearly or monthly income will change depending on the Trust’s investment activity and annual value.
The Trust gets re-valued every year to determine the amount of income to be paid to you. For an adequately managed trust, a CRUT can be an opportunity to earn more income as the Trust grows. CRT assets grow tax-free, and so a CRUT can turn out to be more profitable than a CRAT.
Generate Income and Drive Philanthropy in Santa Clara County, CA.
A CRT, as an estate planning tool, serves these two purposes. It’s an opportunity to earn more from your current assets and give to a worthy cause.
A CRT is a donation that takes care of both you and the charity of your choice. You can transfer cash, stocks, or other assets into the CRT and instantly reduce taxes with Charitable Income Tax Deduction.
If you use cash to fund the CRT, the tax deduction is up to 60% of adjusted gross income. If you use real estate or stock, the deduction is up to 30%.
Because the Trust is irrevocable, the assets you donate get removed from your estate, freeing you of the estate management costs, estate taxes, and capital gains tax obligations.
A CRT is a lucrative estate planning tool. It doesn’t matter how much wealth you own; the benefits are too attractive to ignore. A CRT attorney can advise you when setting up the Trust to avoid penalties for breach of tax laws. The attorney can help to fortify and enforce the Trust legally for its entire lifespan.
Meet Our Team
Santa Clara County Charities
- Charitable Remainder Trust (CRT)
- Charitable Remainder Lead Trust (CLT)
- Charitable Remainder Unitrust (CRUT)
- Charitable Lead Annuity Trust (CLAT)
Learn more: Charitable Remainder Trust Calculator
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