Wednesday, November 09, 2005

Case Study #5- Charitable Remainder Trust

"John Doe" enjoys a situation most of us would envy. He has something in common with people like Oprah Winfrey, Bill Gates and Warren Buffett. He has amassed an estate that will provide for him and his family comfortably for the rest of their lives. It's not exactly on par with Bill G., but secure none the less.

Mr. Doe now can plan to help others less fortunate. He can create one or more Charitable Remainder Trusts.

Let's say John has an office building that he owns outright. It will sell for 10 million dollars. If John or one of his pass through corporations sell the building, huge amounts of capital gains tax and recaptured depreciation would be immediately due on sale.

John, however, would like to give as much of the proceeds from the sale as possible to his favorite charity, The Red Cross. While he is alive, he would like to use the income to make further contributions to other worthwhile causes.

John sets up a Charitable Remainder Trust and has the trust take possession of the office building. The trust sells the building and proceeds are now earmarked for the Red Cross when John passes away. John, however (and spouse) can receive payments from the trust which amount to the interest generated by the principle for the rest of their lives. The principle received for the building is removed from John's estate and the charity will not owe capital gains tax at John's Death. John also receives a deduction on his taxes in the year the CRT is established and funded.

Since John doesn't need the money, he can donate it to whatever other causes he chooses while alive. If he is healthy, he can even use the income to purchase a life insurance policy and at his death, another charity (or beneficiary of his choice) can receive a tax free death benefit of the face value of the policy. This is also a method used by someone less wealthy than John to still leave their heirs the same amount as the principle received and do a good deed for charity as well.

The Charitable Remainder Trust does have it's place in estate planning. Usually when compared side by side to a Private Annuity Trust, the PAT wins for flexibility and additional benefits.

Paula Straub
askpaula@savegainstax.com
http://www.savegainstax.com