Tax Planning
CRUTs are used for a variety of reasons. Often, CRUTs can be used to save income, gift, and/or estate tax. Because the CRUT is a tax-exempt entity a CRUT can be used to sell highly appreciated assets at greatly reduced tax consequences.
For example, assume an individual purchases publicly traded stock for $50,000.00. Assume that, over time, the stock appreciates in value to $1 million. If this individual taxpayer were to sell the stock, the taxpayer would have a $950,000.00 capital gain for income tax purposes, and would be subject to a substantial capital gains tax (this example will assume a combined federal and state capital gains tax rate of 20%, or $190,000.00 of capital gains tax). One tax planning idea would be for this individual to contribute the stock to a CRUT prior to the sale of the stock. The CRUT would then sell the stock. Assuming no other activity in the CRUT account, the $190,000.00 capital gains tax on the $950,000.00 gain would be paid over the lifetime of the taxpayer (without the CRUT, the taxpayer would have to pay the $190,000.00 all at once). The taxpayer would receive an annuity from the CRUT based on the full $1 million dollars of sales proceeds, rather than an annuity (or income stream) based on the $810,000.00 after-tax proceeds.
One possible concern for the taxpayer in the above situation is the risk of death shortly after setting up the CRUT. In such instance, the CRUT proceeds would pay to charity before the taxpayer has received much benefit from the annuity. In addition, at the taxpayer’s death, charity receives the assets that might have otherwise passed to children or other heirs. Because of this, tax planners often suggest that their clients purchase life insurance, to be held separately from the CRUT. Using life insurance mitigates the risk of an early death.
For example, assume the same taxpayer above were to set up a CRUT and were to die quickly. In such instance, the balance of the CRUT would pay to charity. If this taxpayer purchased a $1 million dollar life insurance policy, in the event of the taxpayer’s premature death, the taxpayer’s family would receive the $1 million dollar life insurance proceeds and charity would receive the balance of the CRUT.
With proper planning, the life insurance proceeds received by the family would be free from all income tax and estate tax.
Read more about this topic: Charitable Remainder Unitrust
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