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Charitable remainder trusts: what are they good for? P.2

On Behalf of | May 9, 2011 | Trusts |

In our last post we began looking at charitable remainder trusts and their usefulness in the context of estate planning. Charitable remainder trusts can allow a person to reduce both estate and capital gains tax.

When planning to transfer and convert assets, as happens in estate planning, it is important to consider the capital gains tax and estate tax implications.

In 2011 and 2012, estate tax exemption is $5 million and the upper tax rate is 35 percent. After 2012, the exemption is set to return to $1 million. There is no capital gains tax in 2011 and 2012 for individuals in the 10 percent and 15 percent marginal tax brackets. For all other taxpayers, the tax rate is 15 percent. In 2013, the capital gains tax rate is set to increase to 10 percent for taxpayers in the 10 percent and 15 percent marginal tax brackets, and 20 percent for all others. There will, in 2013, capital gains will also be subject to a Medicare tax of 3.8 percent.

Property sold to help with retirement income or estate planning will be subject to capital gains tax at the federal level and possibly at the state level. When property is placed in a charitable remainder trust and later sold, there are no capital gains taxes, nor is there any taxable estate for estate tax purposes.

In a charitable remainder trust, some of the income generated by the charitable remainder trust can be used to fund an irrevocable life insurance trust, which allows money to pass tax free to one’s heirs while remaining outside one’s estate.

A certain amount of time after the charitable remainder trust is established, a qualified charity may begin receiving money from the trust. This gives one an immediate tax deduction based on one’s gross income. Any amount of the deduction not used in the current year can be used in the following year for up to 5 years.

At least 5 percent of the value of a charitable remainder trust can be paid to any party, usually oneself or one’s spouse. Then, at the termination of the trust, usually life or a fixed number of years, the assets remaining in the trust will be paid to the charity.

Charitable remainder trusts can be useful tools for estate planning purposes, and it is worth speaking to an attorney to find out how one might benefit from establishing such a trust.

Source: The Prairie Star, “Charitable trusts reduce taxes in retirement, estate plan,” Thomas Tilleman, 4 May 2011.