When a client gifts property away, the client no longer has control over or access to the property.  This article discusses Charitable Remainder Trusts (CRT) which may provide a good solution. 

 

A CRT is an irrevocable trust benefiting the donor and a charity.  In the right circumstances, a CRT can remove an asset from the grantor's estate, allow continued access to the income stream and provide the grantor with a current charitable income tax deduction. 

 

The grantor funds the trust with a donation of property.  The grantor retains an income interest in the trust and the charity receives a remainder interest.  The grantor's income interest can last for the lives of the donors (or any other named beneficiary) or for a term of years. 

 

At death, or the end of the trust term, any remaining trust assets go to the charity.  The grantor receives a charitable deduction for the value of the charity's remainder interest in the trust.  The value of that interest is determined under Internal Revenue Service tables.

 

A CRT can also increase grantor's income because no capital gains tax is due on the sale of assets in the trust.  Suppose a client owns a real estate parcel that has appreciated considerably over the years but does not produce much income.

 

At retirement, the client may wish to convert the real estate into an asset that will produce more income.  However, if the asset is sold, all the gain will be subject to capital gains taxes thus reducing the amount available for investment and, of course, the client's income. 

 

However, if the client donates the parcel to a CRT prior to the sale no capital gains tax are due.  Thus the client has the entire value of the asset available to invest.  The client's income is maximized.
 
What about the Children?

One problem with a CRT is that although the grantors receive an income interest in the trust, the asset gifted to the trust is no longer available to the children after the parents die.  One way to replace the value of the asset gifted to the CRT is to use a portion of the trust income to make gifts to fund the purchase of a life insurance policy owned by an irrevocable trust.

 

At grantor's death the heirs receive the net estate after taxes and expenses, plus the life insurance proceeds from the irrevocable trust.

 

Charitable remainder trusts can remove assets from the estate yet allow clients to keep an income. 

 

The CRT can also provide a current income tax deduction and increase a client's income. 

 

Combined with an irrevocable life insurance trust,  the heirs benefit as well as the charity.