The Charitable Remainder Trust

Dear Clients, Colleagues, and Friends,

In 1995, Bill and Sandy met with me to discuss what to do with a real estate investment that had appreciated significantly. The investment represented a meaningful portion of their net worth and they felt the time was right to sell it, but they didn’t need a large infusion of cash, and didn’t want to pay the tax (in 1995, the capital gain rate was 29%).

What Bill and Sandy really needed at that time was income. They had two active teenagers and were paying for private school, travel soccer, spring break trips, summer excursions abroad, etc., not to mention a large house to keep everyone entertained.

I immediately suggested a charitable remainder trust (CRT). It would enable Bill and Sandy to sell the real estate, defer the related capital gain, garner an immediate charitable deduction, and they’d collect income from the trust moving forward.

The CRT worked masterfully for years. They enjoyed the income stream while their children were still in the house and active, then used it to help pay college tuition, and continued using it during a period of world travel during early retirement.

But then things slowed down for Bill and Sandy. They sold their house and moved into a condo near their golf and tennis club.

Today, they continue to enjoy their condo and frequently visit their children and grandchildren for months at a time. Their income need is minimal, and Bill recently had their CPA go on a “quest” (as Bill put it) to reduce their taxable income. “We have more than we need. At this point, it’s all about the kids and grandkids,” said Bill.

The CPA, working with Bill and Sandy’s investment advisors, was able to largely eliminate all of their taxable income streams, except one: their CRT.

“That CRT worked so well for so many years,” said Bill. “But as I look at it now, it’s unlike everything else we owned. Our house worked great, but when the kids moved out, we sold it. Our investment advisors have retooled our portfolio as we’ve gotten older, and we updated our trust and estate planning as the grandkids were born. Heck, even the Suburban we traded in for a sedan. But this CRT, which was such a great fit for so many years, can’t change like those other things.”

“Ah,” I told them at a recent meeting. “Even that CRT we can deal with.”

What Bill and Sandy didn’t know is that their CRT income interest is a capital asset, just like the stocks and bonds and real estate they had retooled over time. So we looked at the options Bill and Sandy had. Since it’s a capital asset, they can:

–          Sell it for cash

–          Roll it into a new CRT for their children and/or grandchildren

–          Give it to charity

For Bill and Sandy, the choice was easy: they sold their income interest and are already using the proceeds. They’ve invested in one of their children’s growing business, another chunk has gone into The 529 Plans for their grandchildren, and the rest they gave to their investment advisors to manage and eventually pass to their children after the last of their deaths.

But Bill and Sandy had another option, which many clients are choosing. They could have rolled their income interest into a new CRT for the benefit of their children and/or grandchildren. While this didn’t make sense for Bill and Sandy, who had immediate ways to deploy the sale proceeds, for those who simply wish to convert their future CRT income into income for their loved ones, this is a great option.

The bottom line? There’s a lot more you can do with your CRT than you probably know. To learn more, please contact me.