Touch the lives of others while creating a lasting legacy and Find peace of mind through a wide variety of tax benefits. Help Richmond Jewish Foundation achieve its goals for current and future generations
Sarah is an 80-year-old donor who plans to donate her vacation home to her favorite charity while providing an income stream for herself. Sarah purchased the vacation home many years ago for $200,000 and it is now valued at $750,000. She is interested in a charitable remainder trust, but is unsure if she prefers a CRUT or CRAT. Her legal advisor informs her the major difference is the fixed percentage payment in a CRUT and the fixed dollar amount payment in a CRAT. Sarah asks her advisor for a comparison of the two trust types.However, standard payout type CRTs are generally disfavored when funding with real estate assets because the funding asset is not liquid. The trustee is required to make payments according to the frequency listed in the trust document of at least 5%. Unless the real estate asset in the trust is generating sufficient income to make the payment, such as rental income, the trustee may not have other liquid assets to satisfy the required payments. If the trust structure is not respected, then the IRS may review the CRT and deem it a non-charitable trust.
If the trust is drafted as a CRUT, Sarah will receive a charitable income tax deduction of $506,910, which based on her 32% tax bracket may save $162,211. The partial bypass of $550,000 gain may save $130,900. She will receive $37,500 in the first year based on the home's $750,000 valuation and will receive payments of 5% for the rest of her life. However, it should be noted that a CRUT is revalued every year to determine the payment amount based on the unitrust percentage. If the value of the trust assets were to increase, that same 5% payment could increase above $37,500. With a CRUT, the donor may experience the benefit and burden of market values fluctuating.
If drafted as a CRAT, she will receive a smaller charitable deduction of $447,255 which may save $143,122. The partial bypass of capital gains remains the same. Her annuity payments remain fixed at $37,500 for her life. Regardless of the trust assets increasing or decreasing in value, the trust must pay out $37,500 annually. Sarah likes the larger charitable income tax deduction and the possibility of higher annual payments with the CRUT and decides to fund a CRUT with her vacation home.
Tom, age 70, plans to fund a charitable remainder trust. He has numerous assets, such as a vacant lot, stock and cash to fund the trust. The vacant lot is valued at $2 million, with a cost basis of $1.2 million. He prefers to use the vacant lot to fund the trust. He is interested in making a large gift to charity at the end of his life. Tom is hopeful to find an option to sell the lot tax-free and create an income stream using the asset. Tom's attorney informs him a NIMCRUT would allow for a tax-free sale. The NIMCRUT would pay out the lesser of the trust income or the unitrust percentage, which is a good option and will allow the trustee time to sell the vacant lot.
Tom will receive a charitable income tax deduction of $1,040,500 in the year of the gift, which based on his 24% income tax bracket may save $249,720. He will bypass up to $800,000 in capital gain, saving $150,400. Tom will receive $101,972 from the trust in the first year after the lot is sold and 5% of the trust as it is revalued every year. Regardless of the payout structure of the CRUT payments, the charitable deduction and capital gain savings remain the same. The major benefit of the NIMCRUT is the trust will pay the lesser of the trust income or the 5% unitrust percentage. In Tom's case, the lot is not currently being rented, so it is not generating income. If the vacant lot cannot be sold in the first year, the trustee can make payments as appropriate based on the net income generated from the trust. Tom likes the benefits of the NIMCRUT and decides to proceed with the trust.
Jon, age 72, and Alice, age 70, own an office building valued at $500,000 that they purchased years ago for $200,000 and, with straight line depreciation, have an adjusted basis of $100,000. They would like to donate the property to charity and want annual income in return. The property is currently producing rental income that fluctuates from time to time. Jon and Alice would like to exit the property management business, but are mindful of the capital gains tax that would be generated if they were to sell the office building. Their estate planning attorney suggested the creation of a trust with a 5% annual payment. Their attorney strongly urges they consider the FLIP CRUT structure to ensure the trustee has adequate time to list and sell the building without running afoul of the trust structure. The trust would pay the lesser of the net income or 5% until the office building is sold. The sale of the property will be drafted as the triggering event in the trust document. The January 1 following the sale will mark the first year the trust will make the standard 5% payments.FLIP Unitrusts and NIMCRUTs are great options for donors looking to fund charitable remainder trusts with real estate. If the donor is contemplating funding a standard unitrust with appreciated property, it is typically preferred by the donor's attorney to draft the trust as a FLIP CRUT or NIMCRUT.
They like the idea of a FLIP Unitrust and decide to fund the trust with the office building. In the year of the gift, they receive a charitable income tax deduction of $179,670. Based on their 32% income tax bracket, it may save $57,494. The bypass of up to $400,000 in capital gain may save $95,200. If Jon and Alice create the trust in March and it takes about a year for the trustee to sell the office building due to market factors, the trust will pay out the net rental income of approximately 3% in the first year. After the property is sold, the trust "flips" to a standard unitrust. The following January 1 will commence the 5% standard unitrust payments. The trust will make a payment of $30,588 for the first year after the property is sold and will continue to pay 5% of the trust as revalued each year for the lives of Jon and Alice. Based on a life expectancy of 24.5 years, Jon and Alice may receive total lifetime income of $769,472. Happy with the potential, they decide to proceed with the FLIP Unitrust.
Mary, age 77, plans to donate her home to charity and hopes for favorable tax benefits. She purchased the home many years ago for $400,000. Since then, she has used the home as her primary residence and it is now valued at $1 million. In addition to favorable tax benefits, she is hoping for a large lump sum of cash. She contacts her attorney, who recommends a charitable remainder unitrust to offset the gain from receiving a large cash sum. He informs her that if the home can be apportioned correctly to the trust, the sale of the home can result in a tax-free outcome. The attorney informs her that she is qualified to exclude $250,000 in capital gain from the sale of her home. Excited about the possibility, Mary asks him to draft the charitable remainder unitrust document and structure the deed to the property accordingly. Mary's CRUT should be drafted as a NIMCRUT or a FLIP CRUT for the best results.Structuring the sale of the property to include the CRUT can provide a zero-tax sale. This is a popular option, but the gift does not need to be structured as such. If the donor is not concerned with owing tax on the sale and prefers more cash proceeds from the sale, the apportionment of the real estate retained and transferred to the trust can be adjusted to meet the donor's goals.
Mary's attorney must be careful to get the timing of the transfer correct. The attorney drafts the CRUT and property deed for Mary to execute. The attorney then records the deed prior to listing the property for sale. If the home were to sell for $1 million, $227,364 must be transferred to the CRUT to achieve a tax-free outcome. She would receive a charitable income tax deduction of $137,385, which based on her 37% income tax bracket may save $50,832. The remaining $772,636 of the sale price is retained by Mary as cash proceeds. Considering the $250,000 home exclusion, the adjusted basis on the sale portion retained by Mary is $559,054, which results in $213,582 of long-term capital gain. Based on her 23.8% capital gain tax bracket, Mary would owe $50,832 in capital gains tax. However, her charitable income tax deduction will offset that capital gains tax owed. Depending on how long it takes the home to sell, Mary may receive little to no income while the home is listed for sale because her CRUT is structured as a FLIP CRUT.
At a 5.5% unitrust percentage, Mary will also receive a payment of $12,505 after the CRUT flips to a standard CRUT. Over her life expectancy of 15.3 years, Mary may receive $191,327 from the CRUT, if the home sells quickly. In total, Mary can sell her home tax-free, retain $772,636 in cash proceeds from the sale and receive $12,505 in the first year the CRUT operates as a standard CRUT, with payments for her life. Excited about the gift Mary asks her attorney to proceed. It is important to note that the zero-tax result may not be realized in the year of the gift due to the deduction limitations on appreciated property, but Mary's charitable deduction can be carried forward for up to an additional five years.