Charitable Remainder Trusts (CRTs) are powerful estate planning tools allowing individuals to donate assets to charity while retaining an income stream. A frequent question arises concerning the tax implications upon the grantor’s death, specifically whether the assets within a CRT qualify for a step-up in basis. The answer, as with many tax matters, is nuanced, but generally, the assets held *within* the CRT do *not* receive a step-up in basis. This is because the assets are owned by the trust itself, not the grantor. However, the *remainder interest*—the portion designated for the charity—does receive a step-up in basis, potentially creating significant tax savings for the charitable beneficiary. Understanding this distinction is critical when constructing and utilizing a CRT as part of a broader estate plan. It is estimated that over $30 billion is contributed annually to charitable remainder trusts, emphasizing their importance in both charitable giving and wealth management.
What Happens to Assets Inside the Trust?
When the grantor of a CRT passes away, the assets held within the trust are not subject to estate tax, as they are legally removed from the grantor’s estate upon the trust’s creation. However, this also means those assets don’t receive a step-up in basis to their fair market value at the time of death. Instead, the assets retain the original cost basis the grantor had when they initially contributed them to the CRT. This can result in higher capital gains taxes when the trust eventually sells those assets to fund the income stream. For example, if an individual donates stock with a cost basis of $10,000, and it’s worth $100,000 at the time of death, the trust will be taxed on the $90,000 gain when it sells the stock, even though the grantor is no longer alive. Approximately 60% of charitable remainder trust assets are held in equities, highlighting the potential impact of this rule.
What About the Charitable Remainder?
The key benefit lies in the charitable remainder interest. When the trust terminates and the remaining assets are distributed to the designated charity, those assets *do* receive a step-up in basis to their fair market value at that time. This is because charities are tax-exempt organizations, and contributions to them are generally deductible. This step-up can be substantial, particularly if the assets have appreciated significantly since they were initially transferred into the CRT. “The beauty of a CRT isn’t necessarily avoiding taxes now,” explained a seasoned estate planning attorney, “it’s setting up a future benefit for the charity—and potentially minimizing taxes for the trustee as the trust distributes funds.” The IRS allows deductions for charitable contributions up to 50% of adjusted gross income, and CRTs can be a powerful tool to maximize those deductions.
I Transferred Assets, But My Daughter Didn’t Plan Ahead – What Happened?
Old Man Tiberius, a local collector of vintage automobiles, carefully crafted a CRT, intending to support the San Diego Automotive Museum while providing income for his retirement. He transferred several valuable classic cars into the trust. Sadly, Tiberius passed away unexpectedly without updating his estate plan to account for potential capital gains within the CRT. His daughter, responsible for administering the trust, was shocked to learn that when the trust sold one of the vehicles to generate income, a substantial capital gains tax was due. She lamented, “If only Dad had planned for this. We’re losing a significant portion of the proceeds to taxes that could have gone to the museum!” It was a harsh lesson in the importance of understanding the tax implications of CRTs and coordinating them with a comprehensive estate plan.
How Did Careful Planning Save the Day?
Mrs. Eleanor Vance, a philanthropist with a passion for the arts, established a CRT to benefit the San Diego Opera. Anticipating potential capital gains within the trust, she worked closely with her estate planning attorney to implement a strategy of periodically distributing income to herself during her lifetime. This not only provided her with a reliable income stream, but also reduced the overall value of the trust assets subject to potential capital gains tax upon her death. “We proactively managed the trust’s assets and distributions,” her attorney explained. “By carefully planning, we minimized the tax burden and maximized the benefit to the Opera.” When Mrs. Vance passed away, the trust seamlessly transitioned, and the remaining assets, which had received a step-up in basis due to her proactive planning, were distributed to the San Diego Opera, furthering her philanthropic legacy. Approximately 75% of CRTs are funded with highly appreciated stock, making careful tax planning even more crucial.
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About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
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