If your portfolio includes highly appreciated assets like stocks, bonds or an investment property, you may want to consider creating a charitable remainder trust. This type of trust allows you to make a substantial tax-exempt donation to a charity or charities while receiving income from the trust during your lifetime.
As the name suggests, assets remaining in the trust transfer to the charity after your death. In addition to generating an income stream, establishing a CRT may offer several tax benefits.
1. Receive a charitable contribution deduction
When you fund a CRT, you may claim a charitable income tax deduction based on the market value of your gift. Depending on your adjusted gross income, you may take a deduction of a certain amount the year you create the trust and carry any further deduction forward for up to five years.
2. Avoid capital gains tax
If you have highly appreciated assets, you may be able to avoid paying capital gains tax on their sale by donating them to a CRT. The trust may then sell those assets exempt from tax, allowing them to fully reinvest your gift.
3. Reduce estate tax liability
Donating appreciated property to a charitable trust effectively removes that asset from your estate. This may result in reduced tax liabilities on your estate at your death.
By starting a charitable remainder trust early, you may be able to leverage income from the trust to fund one or more wealth replacement strategies. This may allow you to enjoy the tax benefits of making a substantial gift to charity while maintaining an inheritance for your family.