Thursday, July 01, 2010

Reviewing CRTs and other Charitable Options

It's been quite a while since my last post and I've promised myself to do better from here on in. With all the "social media" sometimes the tasks get a bit overwhelming.

I want to do a series of posts on Charitable Remainder Trusts. This first installment is why one might decide to set one up. The second, why one might choose to sell their interest, and the third how that sale might be possible.

Why People Create CRTs

There are four main reasons
1. to diversify a highly appreciated asset, while deferring tax on the sale into the future
2. to generate a stream of income for life (or for a set term)
3. to generate an up-front income tax deduction
4. to benefit charity in the future, usually upon the death of the last grantor

Reasons 1 and 2 are closely related, because almost everyone who creates a CRT does so because they expect that the value of the resulting cash flow or income stream will be greater than the amount they could have realized from the sale of the asset. This may or may not be the case after the CRT is set up and is influenced by investment returns, tax rates, and life spans.

Reason 3 is also important. A person receives a tax deduction in the year they fund the CRT. Even if they subsequently sell their income interest, they keep the original tax deduction.

Reason 4 is actually usually quite low on the list. People who generally have high charitable motivation will often opt for a more direct means of donation and support. They may donate the entire asset to a charity and avoid tax on the sale of the asset and not require cash flow. These are people who have more than enough to live on and just want to help a particular cause. Think Bill Gates and Warren Buffet.

Whatever the reason the CRT is created, it may later turn out to be lacking on some level and the grantor may want to sell their remainder interests. The next post will give examples of what may motivate someone to sell.

Paula Straub