Estate planning is highly personal, but it is far from selfish. Planning provides security for loved ones and friends, and it presents incredible opportunities for charitable giving. In our blog post, “Collecting on Your Collection: What to Do with Cherished Goods”, we discussed challenges inherent in distributing personal effects, especially when they are valuable. Today, we discuss one way to make these valuable items work for you and for others.
If you are not particularly interested in holding on to valuable collections, artwork, gold or silver, or other like items, one planning strategy is to donate these pieces into an irrevocable Charitable Remainder Trust (“CRT”). These trusts can benefit you and loved ones while simultaneously furthering philanthropic goals. The CRT pays income to one or more chosen beneficiaries, and when those interests terminate, the remainder is typically paid to a qualified charitable organization.
There are two types of CRTs. One is a CRT that annually distributes a sum certain amount (between 5% and 50% of the initial net fair market value of the CRT property) to one or more persons for a term equal to the life or lives of the person(s) (or for a certain term of 20 years). This is called a Charitable Remainder Annuity Trust. In this type of CRT, the payment never changes. The other is a CRT that annually distributes a fixed percentage (between 5% and 50%) of the net fair market value of its assets, which are valued annually. This is called a Charitable Remainder Unitrust, and like its annuity counterpart, allows beneficiaries to retain their interest for their lifetime (or for a fixed term of 20 years). In this type of CRT, the payment changes ever year, as the value of the assets in the CRT change.
Why might CRTs be a smart option for artwork, gold or silver, or other like items? Consider that the federal capital gains rate on those such items is currently 28%. In 2013, because of an additional 3.8% Medicare tax on investment income, the rate will effectively increase to 31.8% for married couples earning over $250,000 and single individuals earning over $200,000. Depending on what state you live in, you will pay additional taxes to your state. If you sell your valuable collectible assets outright, these rates apply. Conversely, assets sold in a CRT are not immediately subject to income tax (because of the CRT’s charitable status), leaving a greater sum to invest (thereby generating a larger income stream). However, it is important to note that the income tax is only deferred, not avoided. As you (or other persons) receive payment from the CRT, you (or he/she) will, over time, pay the income tax realized on the original sale of the collectible assets. Furthermore, you will receive an income tax deduction of at least 10% of the value of the artwork on collections donated to the CRT (based upon a number of factors, such as the percentage chosen for distributions, age, and current federal assumed interest rate). Not only, then, do CRTs have the potential to provide a healthy income stream to you or your loved ones, but in the end, they can also provide a significant contribution to a charity of choice.
CRTs are complex, but for certain families, they are an option worth seriously considering. Contact us for more information!