By: Ric Edelman
Question: My wife and I own an asset worth about $500,000 with no basis. If we sold it, we would lose maybe 30 percent in state and federal taxes. I see a chance to eliminate those taxes and support a charity I believe in by setting up a charitable remainder trust. I don’t believe we need the proceeds of this asset to live on. We have about $1 million saved in IRAs. We need only about $6,000 a month for expenses, and between the two of us we’ll get $4,300 in Social Security. What’s your opinion of the charitable remainder trust strategy?
Ric: First, let’s explain what a charitable remainder trust (CRT) is and how it works, for those who may not be familiar. You establish an irrevocable trust and gift assets to it — cash or securities, typically. You continue to receive income from the trust, and whatever you don’t receive will go to your designated charity at some future date (perhaps as late as your death).
There are lots of tax benefits of creating CRTs. You can donate appreciated securities (avoiding capital gains taxes). And future growth in the asset’s value occurs outside your estate, reducing future estate taxes.
The downside is that these trusts are irrevocable; once you create and fund them, the decision cannot be undone. So you should hope that you never need the money you’ve given to the trust (beyond the income you’re allowed to receive).
Based on what you’ve said about your assets and needs, it seems you are a candidate to consider a CRT. However, be sure to get more comprehensive financial advice before you proceed.
The use of trusts involves a complex web of tax rules and regulations. This material was prepared for informational and/or educational purposes only. Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.