Charitable Remainder Trusts (CRTs) are powerful estate planning tools, allowing individuals to donate assets to charity while retaining an income stream, but the question of whether those assets qualify for a step-up in basis upon the grantor’s death is complex and often misunderstood. Generally, assets transferred *to* a CRT do *not* receive a step-up in basis at the time of transfer, as that’s considered a gift—effectively a sale to the trust at fair market value. However, the assets *within* the CRT *can* receive a step-up in basis upon the *death of the beneficiary*, not the grantor. This is a crucial distinction, and understanding it can significantly impact the tax benefits realized by both the grantor and their heirs. The IRS generally views the trust as a separate entity for basis purposes, and the valuation at the time of the beneficiary’s death determines the new basis for any remaining assets.
What happens to the assets in a CRT when the beneficiary dies?
When the income beneficiary of a CRT dies, the trust terminates, and the remaining assets are distributed to the designated charitable beneficiary. At that point, the assets receive a step-up in basis to their fair market value on the date of the beneficiary’s death. This means that if the assets have appreciated significantly since they were originally transferred to the CRT, the charitable deduction the grantor received years earlier is effectively ‘offset’ by a lower capital gains tax liability when the charity eventually sells the assets. This can be a substantial benefit, as capital gains taxes can eat into significant portions of an estate. According to a recent study by Cerulli Associates, approximately 68% of charitable donations are made by individuals over the age of 55, highlighting the importance of understanding these tax implications for estate planning.
What if I transfer highly appreciated assets to a CRT?
Let’s consider a scenario where someone transfers highly appreciated stock to a CRT. The grantor receives an income tax deduction for the present value of the remainder interest that will eventually go to charity. However, because the transfer to the trust is treated as a sale, the grantor doesn’t get a step-up in basis for the stock at that time. If the stock continues to appreciate within the CRT, the ultimate benefit comes when the trust terminates and the charity receives the assets. The charity, as a tax-exempt organization, won’t pay capital gains taxes when it sells the stock. This effectively shelters the appreciation from taxes, maximizing the charitable impact of the gift. “Many clients are surprised to learn that the ultimate goal isn’t necessarily to *avoid* taxes entirely, but to *defer* or *re-characterize* them,” Ted Cook, a San Diego Estate Planning Attorney, often explains to his clients.
I heard about a case where a CRT didn’t provide the expected benefits—what went wrong?
Old Man Tiber, a retired fisherman, meticulously planned his estate. He transferred a significant portion of his stock portfolio to a CRT, anticipating a substantial charitable deduction and minimized capital gains taxes. However, he failed to properly coordinate the trust with his overall estate plan. When his daughter, the income beneficiary, passed away, the trust terminated, and the assets went to the designated charity. Unfortunately, because the trust document didn’t explicitly address estate taxes, the value of the CRT assets was included in his daughter’s estate, negating much of the anticipated tax benefit. It was a painful lesson, illustrating the critical need for comprehensive estate planning. The family ended up working with Ted Cook to restructure the plan, ultimately realizing the intended tax advantages but after significant legal fees and heartache.
How can I ensure my CRT works as intended?
Mrs. Eleanor Ainsworth, a seasoned investor, understood the importance of meticulous planning. She created a CRT with her husband, intending to benefit a local university. They worked closely with Ted Cook, ensuring the trust document was seamlessly integrated with their wills and estate tax strategy. When her husband passed away, the income from the CRT provided Eleanor with a comfortable income stream, and the trust remained a vital part of their estate plan. Upon her death, the remaining assets were distributed to the university, providing a substantial gift without incurring significant capital gains taxes. This success stemmed from proactive planning and a clear understanding of the complex rules governing CRTs. Ted Cook stresses to clients, “A CRT is not a ‘set it and forget it’ solution. Regular review and coordination with your estate planning attorney are essential to ensure it continues to meet your goals and adapt to changing tax laws.”
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
(619) 550-7437
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