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3 potential tax advantages of a charitable remainder trust

Philanthropic individuals who have highly appreciated assets that create minimal income may want to consider creating a charitable remainder trust.

This type of split-interest trust allows a donor to make a gift to charity while retaining an interest in the income the trust generates for a specified period. Upon the donor’s death, trust assets transfer to the charitable organization. In addition to creating cash flow, a CRT may offer several tax benefits.

1. Receive an immediate income tax deduction

Individuals who create a CRT may be eligible for a charitable income tax deduction at both the federal and state level when funding the trust. The size of the deduction may depend on the calculated value of the remainder interest the charity will ultimately receive.

2. Minimize capital gains tax liability

The sale of assets by a charitable trust is generally tax-exempt. By funding a CRT with substantially appreciated assets, a donor may be able to preserve the value of those assets by avoiding capital gains tax.

3. Reduce estate tax burdens

Donating an asset to a CRT effectively removes it from the donor’s estate. The IRS may include trust assets in the donor’s gross estate after his or her death. However, the estate may in turn take a charitable tax deduction in the amount of the assets’ fair market value.

Donors to a CRT may not have to choose between leaving a legacy to their heirs or to charity. By leveraging the income the trust generates to fund wealth replacement strategies, a donor may be able to contribute a substantial gift while preserving assets for loved ones.