Charitable Remainder Trusts (CRTs) present a sophisticated yet effective tool for business founders contemplating an exit strategy that aligns financial goals with philanthropic desires. These trusts allow owners to donate appreciated assets, like company stock, to a charitable organization while retaining an income stream for a specified period, ultimately benefitting a chosen cause. The structure allows for immediate tax benefits—a deduction for the present value of the remainder interest—and deferral of capital gains taxes on the appreciated assets transferred into the trust, presenting a win-win scenario for both the founder and their philanthropic vision. Approximately 65% of all charitable giving in the United States comes from individual donors, with a significant portion involving appreciated assets, making CRTs a popular vehicle for substantial gifts.
What are the tax advantages of using a CRT for my business sale?
The tax benefits associated with CRTs are substantial and can significantly impact the net proceeds from a business sale. When appreciated assets—like shares in a closely held company—are transferred into a CRT, the founder avoids immediate capital gains taxes on the appreciation. Instead, tax is paid on the income received from the trust as ordinary income, potentially at a lower rate than capital gains, and the remainder eventually goes to the charity. For instance, if a founder has stock with a basis of $100,000 currently valued at $1,000,000, transferring it to a CRT avoids immediate capital gains tax on the $900,000 appreciation. Furthermore, the donor receives an immediate income tax deduction in the year of the transfer, based on the present value of the remainder interest ultimately going to charity, as calculated using IRS life expectancy tables and applicable interest rates. A well-structured CRT can therefore free up substantial capital for other investments or personal needs.
How do I structure a CRT to maximize my income stream?
Structuring a CRT to maximize the income stream involves careful consideration of the type of trust—either a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT)—and the payout rate. CRATs provide a fixed annual payout amount, offering predictability but potentially less flexibility during periods of fluctuating investment returns. CRUTs, on the other hand, pay out a fixed percentage of the trust’s assets, recalculated annually, offering more potential for growth but also more risk. The IRS limits payout rates to 5% or 10% of the initial net fair market value of the assets transferred. “We often recommend a CRUT for business owners exiting a company,” shares Ted Cook, an Estate Planning Attorney in San Diego, “as it allows them to benefit from continued growth of the assets while supporting their chosen charities.” Choosing the right asset to contribute is also critical; highly appreciated, illiquid assets like private company stock are often ideal.
What happened when a client didn’t plan their exit with a CRT?
I remember working with a client, let’s call him Robert, who built a successful software company over two decades. He was selling it for a substantial sum, but hadn’t considered the tax implications beyond a basic capital gains calculation. He intended to donate a significant portion of the proceeds to his alma mater, but by the time he considered it, the immediate tax bill on the sale had consumed a large chunk of his available funds. He ended up making a much smaller donation than he’d originally envisioned, and felt deeply frustrated that he hadn’t structured the sale more strategically. It was a painful lesson in the importance of proactive estate planning, and showed the need for understanding the interplay between business exits and charitable giving. He felt he could have funded a full scholarship endowment if he had thought through the tax implications and structured a CRT.
How did a CRT turn things around for another business founder?
Conversely, I worked with Sarah, a founder who had built a thriving organic food company. She was determined to make a substantial philanthropic impact with the proceeds from the sale, but also wanted to ensure a comfortable retirement income. We structured a CRUT, contributing a significant portion of her company stock. This allowed her to defer capital gains taxes, receive a steady income stream for 20 years, and ultimately direct the remaining assets to an environmental conservation organization she was passionate about. The CRT not only minimized her tax burden but also aligned her financial goals with her philanthropic values, providing her with peace of mind knowing her legacy would extend beyond her business success. She often shared how fulfilling it felt to have a financial plan that supported both her personal needs and the causes she cared deeply about. It was a truly beautiful example of how strategic estate planning can create a win-win scenario for everyone involved.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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