Charitable Remainder Trusts – Not Nearly the Panacea They Seem

Written By — David Shafer

Thought I would talk a little about Charitable Remainder Trusts in response to BawldGuy’s post, “Retirement Dream a Nightmare….” First, some background in my involvement with CRTs. I will give you the full explanation in a later post, but for now I will tell you that I am a partner in a business that manages CRTs in order to create additional sources of income for non-profits. Currently, over 80% of real estate donations are not consummated because the non-profits don’t have the expertise or the structure to accept the donation.

The point of CRTs is not to dodge taxes, but to encourage donations of appreciated assets to non-profits. Hence, they rarely solve tax problems; merely create some tax advantages for the donor. Folks that push CRTs as a way to solve tax problems tend to create as many unintended problems as they solve.

Here are the general tax rules.

I am not an accountant so make sure you get advice from one before entering into a CRT. You can only deduct up to 30% of your gross adjusted income per year with a five-year carry forward. This limits your tax deduction to effectively 150% (5 X 30%) of your income. You may also avoid capital gains taxes by donating the property. Once you donate the property you can have the CRT pay you or your heirs either a certain amount per year for a fixed amount of time or a percentage of the donation per year. Generally, this is 5-7% of the asset value per year. If you attempt to set it up with a method that will obviously drain the entire asset value from the trust to you, then the IRS could invalidate the CRT, because the entire point of the CRT is to create a donation.

As you see from the above, CRTs are hardly a tax panacea. It is also not a great tool for folks who are mostly dependent upon income from the asset they are thinking of donating. They are a great tool for both donating an asset and gaining tax benefits or tax benefits with additional lifetime income. To fully take advantage of CRTs you need to have a fairly substantial income emanating outside of the donated asset or plans to sell other large assets that you would like to offset taxes. It is perhaps best for those assets that you don’t want to manage and you have extracted the majority of benefits from. But, remember the object of the CRT is to donate assets, so that should be the overriding concern.

BawldGuy Here: As you can easily discern, the CRT definitely is not what most folks would or should describe as their Plan A for a retirement exist strategy. I’ll be talkin’ more about this later in the week. Also, I’ll be talking in some detail on this subject tomorrow on BiggerPockets.

Related posts:

1. Retirement Dream a Nightmare If Real Estate Investor Hasn’t Planned Well