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Charitable Planning

If you are a person who regularly gives money to charity, this planning strategy may be a good option for you. Using charitable planning, you can give money to a charity and get a tax break.


Types of Charitable Planning

Charitable Remainder Trust 

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays a beneficiary or group of beneficiaries a sum of money each year for a specified period of time and at the end of that specified period of time donates the remainder of the trust assets to the designated charity. You get a tax deduction based on the value of the future gift. There are different types of CRTs. There is Charitable Remainder Annuity Trust which pays a fixed amount each year for the term of the trust. There are also several versions of Charitable Remainder Uni Trusts. The Uni Trust is designed to be more flexible on the yearly payments. There can be an interest only Uni Trust where the trust will pay the trust interest out every year to the beneficiary for the term of the trust. The idea behind choosing the Uni Trust design is to put in the flexibility that is important to you.

Common uses for CRTs are to eliminate capital gains completely for highly valued real property and C-corporation stock. The trick to eliminating the capital gains is you MUST sell the asset in a CRT. The proceeds from the sale then stay in the CRT. The charity gets at least a 10% remainder interest in the fair market value of the asset contributed to the CRT. If you are charitably inclined, you can eliminate your capital gains entirely. If, however, you sell the asset before you open the CRT it is too late to eliminate the capital gain.

Example, Pat, 77, owns an apartment building. She is tired of dealing with the tenants and wants to sell. She wants to travel and have fun. The apartment is fully depreciated and the capital gains on this building is very high. Pat can put the apartment in the CRT and sell it in the CRT and would then have no capital gains. She can set up the CRT to provide her and her daughter with income for the next 20 years.

Charitable Lead Trust

Another type of trust is Charitable Lead Trust (CLT). A CLT pays the charity first for a term of years. The longer the charity is paid the higher the income tax deduction. At the end of the term, the remaining assets revert to the beneficiaries. The idea is to choose an interest rate to pay to the charity on the assets placed into the trust. The trick is to not deplete the principal during the time the charity is getting the distribution. Ideally, however, the asset is invested and that investment is creating enough income to pay the charity and grow the principal. Typical beneficiaries are children and grandchildren.

In general, CLTs are best utilized to move a portion of your estate to your children or grandchildren thus lowering the cost to transfer the assets to that generation.

There are two types of CLTs, a Charitable Lead Annity Trust and a Charitable Lead Uni-Trust. The donor gets a gift tax charitable deduction for the amount of the transfer that is attributable to the charitable beneficiary. One benefit is it allows you to pass a larger amount of your estate to your grandchildren without the need to pay generation-skipping transfer tax that is normally required.

Qualified Small Business Stock Trusts

A Qualified Small Business Trust is another way to save on capital gains for those business that qualify. In fact, it allows a 100% exclusion from federal tax on the first $10M of capital gains when the stock is sold.

The requirements are as follows:

(i)   The entity has to be a US domestic C-corp.

(ii)   Stock holder must have held the stock for a minimum of five years.

(iii)   After September 27, 2010, the stockholder must have acquired the original stock price, in exchange for cash or property other than cash or stock, or services.

(iv)   The aggregate gross assets of the corporation that issued the stock cannot have exceeded $50 million at any time before (and including the time immediately after) the issuance of the stock to the taxpayer. This is generally measured by the corporation's adjusted tax basis in those assets.

(v)   During substantially all of the stockholder’s ownership period, at least 80 percent of the corporation's assets must actively be conducting one or more qualified trades or businesses.

(vi)   The corporation must not have engaged in redemptions of its own stock during specified periods before or after the date of issuance of the stock to the shareholder.

This technique is very effective and can be used for and individual and also provide additional deductions by setting up trusts. We are able to set up multiple trusts depending on your family situation. The ideal time to use this technique is before a C-corp is sold or before an IPO. Maybe you own stock in your company and it is going to be merged with a larger company and your stock will be split multiple times vastly increasing the value.

The important part of employing this technic is timing. Unlike the CRT, there are no restrictions on the use of the $10.0 million.

Call our office today at 703-442-3890 for assistance in any of these capital gains savings techniques.