Listen carefully: What does a CRT sound like?

by Josh Dukelow, gift planning officer

Imagine a typical meeting. The client sits down and begins the meeting something like this:   

“I’ve got a prime tract of land I bought for $200,000 just 10 years ago, and now I am sure I could sell it for $2 million because the market for new residential development is so hot in the area. I need to act fast because I am not sure how much longer this real estate boom will last.” 

Did you hear that? Slow down… before you suggest that your client put the property up for sale as soon as possible, consider asking a few more questions that could save your client a lot of money and help satisfy the client’s income and charitable giving goals at the same time. 

“That’s fantastic,” you say. “I recall your current estate plan already includes bequests to hospice, animal rescue, and the art museum. There is actually a way to wrap those goals into your strategy for selling the land. Would you like to hear more about that?”  

“Hmmm.” The client is considering your idea. “If it’s all the same in terms of which charities receive money when I die, sure, I’m open to it.”  

“Good,” you respond. “Now, remind me, does this property produce any income for you right now?”  

“Unfortunately, no,” replies your client. “I’ve never had time to develop the land, so it just sits there. At least the value has been going up.” 

“Ah,” you respond. “With the giving technique I have in mind, you may be able to use that property to secure an income stream for the rest of your life and satisfy your charitable goals, while capitalizing on the property’s increased value. You also might be able to eliminate some tax liability. What do you think?” 

“That sounds great,” is your client’s response, which you predicted.  

So what idea is on your mind for this client? Hint: Its initials are C R T.  

That’s right. CRT. A charitable remainder trust (“CRT”) is a “split interest” charitable planning tool that allows your client to transfer an asset (in this case, real estate) to an irrevocable trust, retain an income stream, and earmark what’s left (the “remainder”) to pass to a charity or charities of the client’s choice. 

In the hypothetical situation, your client could establish a fund at the Community Foundation that would receive the trust’s assets at the end of the income stream (often defined in years or lives). Then, the client’s fund at the Community Foundation can distribute those assets (or the cash generated by liquidating them) to nonprofit organizations according to the client’s wishes. 

Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, there are numerous tax advantages for the client: 

• When the client transfers the property to the CRT at a fair market value of $2 million with a cost basis of $200,000, and then the CRT sells the property, the CRT itself does not pay tax on the $1.8 million capital gain. 
• This leaves the full $2 million in the trust to be invested and providing for the client’s retained income stream.  
• The client is eligible for a current charitable tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream. 

• Payments to the client generally are subject to income tax during each year of the distributions, but under more favorable terms than if the client had conducted an outright sale.  
• Because the CRT is an irrevocable trust, the property and its proceeds (other than what winds up in the client’s estate from the retained income stream) are excluded from the client’s estate for estate tax purposes.  

Contrast this with an alternative scenario in which your client sells the property, realizes a $1.8 million capital gain, pays tax on that gain, and ends up with, say, $1.5 million (probably less!) with which to invest, give to charity, and draw from for income. And, in this situation, the proceeds would be included in the client’s estate for estate tax purposes. Clearly, not ideal. 

When you “hear a CRT” during a client meeting, call us! The team at the Community Foundation is happy to be your partner and help to fulfill your client’s charitable legacy. Just ask us how. 

The Community Foundation for Greater Atlanta is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. Call Alison O’Carroll, director and philanthropic counsel, at 404.333.0241 or aocarroll@cfgreateratlanta.org to discuss a charitable planning opportunity or set up a presentation about planned giving techniques at your office. We would love to talk! 

This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.