If it weren't for a great void of other forms of tax
shelter, there wouldn't be nearly as much interest in the tax benefits
of the charitable remainder trust (CRT). But ... because of the dearth
of other tax saving devices, the CRT has become one of the really HOT
financial planning tools for Americans in the 1990s and until the
passage of the 2003 tax law.
Proponents claim it will do virtually everything anyone
could ever want. According to the more exuberant advocates, you can use
a CRT to avoid income taxes, to avoid capital gains taxes, to avoid
estate and gift taxes and to protect your assets from the claims of
every form of predatory creditor.
Cooler heads argue that when you examine the details and run
the numbers, it's just another of a wide range of financial options.
Those who make their living helping taxpayers to establish and
administer the charitable trust are the most vocal in arguing that this
device is not a tax dodge or tax "loophole". You (or someone in your
family) gets an income for life or for a term of years. Later, a charity
gets what's left. In many ways, the charitable remainder trust is
an alternative to a life income annuity with an insurance company,
but with a few extra bells and whistles and with a lot more tax
benefits.
One of the primary motivating factors in using a CRT was the
deferral of the capital gains tax on the sale of highly appreciated
assets such as the stock of a successful family business. During most of
the Clinton era, the top federal tax rate on long term capital gains
was 28% and many states would add another 10% to the total tax.
Investors and business owners were very reluctant to pay that tax and
were willing to consider the alternative of leaving some assets to a
charity rather than giving the money to the IRS. When the top rate on
long term gains was reduced to 20% in 1999, this reduced the financial
benefit of the CRT but did not eliminate the interest of many
investors. Then, in 2003, Bush introduced a top federal tax rate of 15%
on long term gains -- which was enough to cause many investors to lose
interest in the CRT.
In addition, the federal estate tax has been another
substantial motivation for use of the CRT. But, since 2001, the federal
estate tax exemption has been increased from $675,000 per taxpayer
to $1,500,000 (for 2004 and 2005). For those taxpayers
whose primary motivation is to leave as much of their estate as
possible to their children and grandchildren, the appeal of the CRT has
been reduced.
But for those who have no children or grandchildren or those
who believe that a large bequest of funds would be detrimental to their
well being, the CRT is still an excellent tool to defer taxes, insure a
lifetime income, be able to manage the funds in the CRT and then leave a
substantial endowment to a charity or charities of your choice.
It also offers substantial protection for the assets in the CRT during
your lifetime.
