Yes, you absolutely can establish a charitable remainder trust (CRT) using appreciated stock, and it’s a powerful estate planning tool for those looking to maximize both charitable giving and potential tax benefits. A CRT allows you to donate assets, typically securities like stocks, bonds, or mutual funds, to an irrevocable trust, receiving an income stream for a specified period or for life, with the remainder going to a charity of your choice upon your death or the end of the income term. This strategy can be significantly more advantageous than a direct cash donation, particularly when dealing with assets that have increased substantially in value.
What are the tax benefits of donating appreciated stock?
Donating appreciated stock directly to a charity can result in a tax deduction equal to the fair market value of the stock, but is limited to 30% of your adjusted gross income. However, by transferring appreciated stock to a CRT, you bypass immediate taxation on the capital gains that would otherwise be triggered by a direct sale. The trust then sells the stock, and the proceeds are used to generate income for you. As of 2023, over $336 billion was given to charity by individuals in the US, with a significant portion coming from appreciated assets. This allows you to avoid capital gains taxes while also receiving an income tax deduction for the present value of the remainder interest that will eventually go to the charity. Furthermore, the income you receive from the CRT may be partially tax-free, depending on the type of CRT established – either a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT).
How does a CRAT differ from a CRUT?
A CRAT pays a fixed annuity amount each year, regardless of the trust’s investment performance. This provides a predictable income stream but offers less flexibility. A CRUT, on the other hand, pays a fixed percentage of the trust’s assets, recalculated annually. This means your income can fluctuate with the market, potentially offering higher returns in good years but lower income in down years. For example, let’s say someone donates $500,000 in appreciated stock to a CRUT with a 5% payout rate. In the first year, they’d receive $25,000. If the trust’s investments grow to $600,000 the following year, the payout would be $30,000. Over 70% of CRTs established are Unitrusts, as they offer more flexibility, but both types require careful planning to ensure they align with your financial goals and charitable intentions.
What happened when Mr. Henderson didn’t plan ahead?
I remember Mr. Henderson, a retired engineer, who came to me after his wife passed away. He’d held a substantial portfolio of technology stock for decades, and it had grown tremendously. He wanted to leave a significant legacy to his local university, but he’d also hoped to receive some income during his retirement. Unfortunately, he’d waited too long and directly donated a portion of the stock. He was hit with a hefty capital gains tax bill, effectively reducing the amount available for both his retirement income and the university’s endowment. He was deeply frustrated that his well-intentioned gift wasn’t going as far as he’d hoped. It was a painful lesson demonstrating the importance of proactive estate planning. According to a study by Fidelity Charitable, careful planning can reduce tax burdens by as much as 20-30% when donating appreciated assets.
How did Mrs. Gable successfully use a CRT?
Then there was Mrs. Gable, a local artist, who had a similar situation. She owned a large block of stock in a publicly traded art supply company. Instead of a direct donation, we established a CRUT. She transferred the stock to the trust, and the trust sold it without triggering immediate capital gains. She received a fixed percentage of the trust’s value each year for her lifetime, providing a steady income stream. The remainder, after her passing, went to the San Diego Museum of Art, fulfilling her philanthropic goals. She was thrilled not only to support the museum but also to avoid a significant tax burden and maximize the impact of her gift. As of 2024, CRTs have helped individuals donate over $100 billion to charitable organizations, proving their effectiveness as a philanthropic tool. It was a truly rewarding experience to see her vision come to fruition, demonstrating how strategic estate planning can benefit both the donor and the chosen charity.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
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