Self-directed CRT’s
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Why establish a Charitable Remainder Trust
There is no pat answer to why people establish their own charitable remainder trust (CRT) or trusts. Reasons vary with each person’s individual situation. Often there is a combination of reasons. The following are the most common reasons that people choose to establish a self-directed charitable remainder trust:
ELIMINATE TAXES ON ASSET PROFITS:
People with highly appreciated assets generally would prefer not to pay taxes on the gain and to keep the tax dollars for their benefit and the benefit of their heirs. Depending upon whether the gain is long-term capital gain, or ordinary income, and whether their state of residence has a tax on the gain, the tax on gain can range from 15% to as high as 60% of the recognized gain. Moving title of the asset into a self-directed CRT prior to sale is about the only direct method besides a 1031 exchange to avoid or eliminate the taxes on gains in real estate.
CONVERT HIGH LIABILITY AND HIGH MANAGEMENT ASSETS TO LOW LIABILITY AND LOW MANAGEMENT ASSETS WITHOUT A TAX CONSEQUENCE:
This reason is directly related to the first reason. The nuance is that the focus is to transfer ownership of property or a business to passive retirement or life-stability income without going through the tax step. A self-directed CRT is an especially good strategy for those ready to retire who have large management intensive real estate holdings or operate one or more businesses.
PROTECT THE RETIREMENT OF A SPOUSE OR THE LIFE CARE OF A LOVED ONE:
Sometimes there are situations where a spouse, child or other loved one is not in a position or might not be capable of, maintaining or managing, a portfolio of assets or operating a business upon the death of the primary provider. This is often the case when there is a long-term health issue in a family. A CRT program is an excellent vehicle to provide for the maintenance of the investment assets while the provider is alive and to protect and provide for the spouse or other family member who is incapacitated in some manner after the death of the primary provider.
ELIMINATE PROBATE AND ESTATE TAXES UPON DEATH:
Many people who have accumulated substantial assets are not aware of the devastating affect probate and estate taxes will have on the assets passed to heirs. As of 2004, Federal death taxes amount to 45% of all assets over $1,500,000. It is relatively easy to have an estate of $2 million or more with only a nice home, an adequate insurance plan, an IRA or 401(k), and a few other assets. A $2 million estate means a Federal death tax bill of $225,000 in addition to death taxes levied by some states. Unless the estate has $225,000 or more in liquidity, such taxes can present a great problem to the heirs. A self-directed CRT with a companion Wealth Replacement Trust completely eliminates death taxes AND PROBATE. Most people do not realize that if they only have a will, it MUST be probated through the court, which results in costs to their estate and makes the list of all of their assets public records of the court. In addition, probate can take anywhere from a few months to several years depending upon the situation in the estate. A simple and inexpensive CRT program can totally eliminate both death taxes and probate.
“I DON’T WANT ANY OF MY HARD-EARNED ASSETS TO GO TO THE GOVERNMENT.”
This reason has motivated a significant number of people to establish one or more CRT programs to benefit themselves and their family. Many people feel that they have worked hard, sacrificed, and paid high taxes all of their life and do not feel they should pay even more and higher taxes because they have died after accumulating substantial financial assets.
LEAVE AN ONGOING LEGACY TO HELP THEIR FELLOW MAN:
It is surprising how many much less than super-wealth people are motivated to do something of lasting service to their fellow man. Often, they have suffered a tragedy or health problem themselves or within their circle of family and/or friends. They would like to leave the use of their assets to seeking a cure or helping the needy when they die. Some people want to leave their assets to support activities to meet the spiritual needs of their fellow man. The classic case is someone who has owned an asset for a long time resulting in a tremendous increase in current value. The person is financially comfortable for their life needs and does not necessarily want or need to leave a large estate to their heirs. Unless they do some planning, upon their death, a substantial portion of their assets can go to probate costs and death taxes and their desires to leave a legacy for charitable purposes never gets accomplished. A self-directed CRT program is an ideal vehicle to accomplish this objective. A self-directed CRT permits them to keep control of their assets while they are still alive and then to direct the benefits to multiple charitable purposes after their death if they choose.
ASSET PROTECTION
Some people in their late 30’s or 40’s use one or more CRTs as part of their asset protection program. Unfortunately, we live in the most litigious society on earth. One does not have to do anything wrong to have their business and themselves personally sued and suffer a huge financial judgment. Something as simple as a part-time employee having an accident on the way to the office supply store for your business can cost you everything you own now and all the income you can make for the rest of your life. A properly designed CRT with the companion Wealth Replacement Trust can shield assets from just such eventualities and liabilities. A financially successful younger person with a family can use a CRT more effectively for both retirement and family asset protection than they can use an IRA or individual pension plan. This is especially true when the high-income producing business activity is primarily dependent upon the person operating the business. What value does the business have in the event of the premature death or disability of the operating person? A CRT and wealth replacement trust can provide that protection.
This is not a comprehensive list of motivations but probably encompasses the vast majority of people who establish self-directed CRTs. The CRT has been in tax law since 1917 and the safe harbor rules were published in 1968. This is a well-established and well-tested financial planning tool. Only in the past decade has it been explored and become more wide spread in its use, especially with real estate assets. CRTs are very flexible in how they can be structured under the rule to meet individual situational needs. In addition, they are relatively simple and inexpensive to establish. One source for additional information on self-directed charitable remainder trusts is www.nobletrustcompany.com or I can be reached at (800) 459-9002 or jtwilson@earthlink.net.
