Using a Charitable Remainder Trust for the Sale of an Appreciated Asset
Presented by David Berman
A charitable remainder trust (CRT) is an irrevocable trust that allow donors (called grantors) to give
money or property to charities while also retaining an income stream. The grantor, or someone of their
choosing, can receive an income for a term of up to 20 years or for the life of one or more noncharitable
beneficiaries. At the end of the income term, at least one charity will receive the remaining assets
in the trust.
Provided that the CRT complies with all IRS requirements, the trust will be tax exempt, and the grantor is
eligible for a charitable contribution deduction based on the present value of the remainder interest when
the trust is funded.
Below, we’ll review the process for using a CRT to sell an appreciated asset.
How to Sell an Appreciated Asset Using a CRT
First, you must work with your attorney to draft a CRT document and determine the appropriate structure,
income timeline, and payout rate for the trust. Once your CRT has been established, you can begin the
process of retitling your appreciated asset in the name of the trust.
To avoid immediate capital gains tax liability, the asset (or a portion of the asset) must be transferred
before it is sold. Additionally, you cannot already have a binding agreement in place to sell the asset to a
third party, or you may be forced to recognize the gain anyways.
Once the asset is retitled to the trust, it can be sold. Options for asset sales through a CRT include:
- Small businesses: Sole proprietorships, partnerships, limited liability companies, C-corporations
- Residential real estate: Secondary residences, rentals
- Commercial real estate: Shopping centers, medical centers, offices, apartment complexes,
warehouses, industrial buildings, farmland
How Do Distributions Work?
Although tax exemption makes a trust an ideal vehicle for selling an appreciated asset and receiving an
income stream, the distributions to the income beneficiary are not tax exempt. The trust tracks all taxable
activity and builds up four buckets of income:
- Ordinary income (e.g., dividends and interest)
- Capital gains
- Tax-free income (e.g., municipal bond income)
- Return of principal
Distributions to the income beneficiary will first pull from ordinary income until that bucket is exhausted,
then from capital gains, and so on. Because the taxation will often be spread out over multiple years of
distributions, the income beneficiary will usually pay a lower overall effective rate on the sale of the
appreciated asset.
A Pivotal Role
Using a CRT to sell an appreciated asset can not only help you to manage the tax liability, but it can also
be a pivotal part of your financial plan, ensuring that you or your beneficiaries receive an income stream
while also meeting your charitable goals. The rules and procedures for transfers of these types of assets
to a CRT are complex, so it is essential to work closely with your attorney and tax advisor.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although
we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional
tax advisor, or lawyer.
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