Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Charitable Remainder Trusts Cut Capital Gains Taxes
Transcript
- Lucas: If you own a highly appreciated asset — say a business you started decades ago or commercial real estate bought for pennies on the dollar — selling it triggers a capital gains tax that can eat up twenty percent or more of the gain. But there's a vehicle that lets you avoid that tax, generate a charitable deduction, and still draw income for life. It's called a Charitable Remainder Trust, and it's one of the most elegant tools in the ultra-wealthy playbook. Luna: I've heard of CRTs, but aren't they mostly for very wealthy families? What's the minimum that makes sense? Lucas: Typically you want at least a few hundred thousand dollars to justify the legal and administrative costs. But for families with multi million dollar concentrated positions, it can save millions in taxes. Let me walk through a concrete example. Say a family owns stock worth $10 million that they originally purchased for $1 million. If they sell directly, the $9 million gain is taxed at up to 23.8 percent federal rate, plus state. That could be $2.5 million gone to taxes. Luna: Ouch. So instead, they contribute the stock to a CRT? Lucas: Exactly. The trust is tax-exempt, so it sells the stock without any capital gains tax. Now the full $10 million is reinvested in a diversified portfolio. The trust then pays the family — or whomever they name as income beneficiary — an annual stream for life or for a term up to 20 years. At the end, the remaining assets go to a designated charity. Luna: So the family gets income and avoids the upfront tax hit. Plus they get a charitable deduction, right? Lucas: Yes, a partial deduction in the year they fund the trust. The IRS calculates the present value of the charity's future remainder interest. For a 65-year-old with a 5 percent unitrust payout, that deduction might be 20 to 30 percent of the contribution — so $2 to $3 million on our $10 million example. And that deduction can be carried forward up to five years. Luna: That deduction alone is significant. But the payout structure matters — what's the difference between an annuity trust and a unitrust? Lucas: A Charitable Remainder Annuity Trust pays a fixed dollar amount each year. A Unitrust pays a fixed percentage of the trust's value, recalculated every year. The unitrust can grow with the market, so if the portfolio performs well, the income increases over time. The annuity trust gives certainty but won't adjust for inflation. Luna: And I assume the IRS has rules on how much the trust can pay out? Lucas: Yes, the payout rate must be at least 5 percent and no more than 50 percent of the trust's initial value each year. Also, for unitrusts, the remainder interest must be at least 10 percent of the initial fair market value. That prevents the payout from being so high that nothing's left for charity. Luna: So the structure forces a trade-off between current income and the charitable legacy. Lucas: Exactly. And that's where planning gets interesting. You have to balance your income needs, your philanthropic goals, and the tax benefits. It's the kind of strategy where expert advice pays for itself. Luna: It really is. And speaking of things that pay for themselves — Lucas, a reminder that our podcast stays ad-free thanks to listeners who chip in a few dollars a month. Lucas: Yeah, buy me a coffee dot com slash fexingo — it genuinely makes a difference. If you've gotten value from episodes like this one, that's the place to keep us going. Luna: Agreed. So back to the CRT — one limitation people worry about is flexibility. Once assets go into the trust, you can't change beneficiaries easily. Lucas: That's right. The trust is irrevocable. You can name successor income beneficiaries, but once set, you can't add or remove primary beneficiaries. And if you need to access the principal, you can't — the trust owns the assets, not you. So it's for assets you don't plan to touch in a lump sum. Luna: But you can use the income stream to buy life insurance, right? To replace the charitable remainder for your heirs. Lucas: Common strategy: take a portion of the trust income to fund a life insurance policy owned by an Irrevocable Life Insurance Trust. That way, when the CRT terminates and the remainder goes to charity, your heirs get a tax-free death benefit. The family ends up with income, a tax deduction, and a legacy for children — all while supporting a cause they care about. Luna: So it's a win win win if structured correctly. What kinds of assets work best for a CRT? Lucas: Highly appreciated, low-basis assets are ideal — publicly traded stock, closely held business interests, real estate, even cryptocurrency if it's held in a form that can be contributed. The key is that the asset would otherwise generate a big capital gain if sold. You don't want to contribute cash because the benefit comes from avoiding the gain. Luna: And the charity has to be a qualified public charity or private foundation, right? Lucas: Yes, the remainder must go to a 501 organization. Some families name their own donor-advised fund or private foundation as the charitable beneficiary. That gives them control over where the funds eventually go. Luna: So it's a way to support their own philanthropic mission while getting the tax benefits. Lucas: Exactly. The question is whether this strategy makes sense for your specific situation — and that depends on your age, your asset base, and your philanthropic goals. Luna: And the charitable cause you want to support after your income stream ends. Lucas: Right. It's not a one-size-fits-all, but for the right family, a CRT can transform a tax problem into a legacy.