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Charitable Remainder Trust Taxes 101: Capital Gains, Deductions, and More

Charitable Remainder Trust Taxes 101: Capital Gains, Deductions, and More

May 22, 2023

When it comes to your financial planning for the future, you want to keep as much of your money in your pocket and accounts as you can. A charitable remainder trust (CRT) can minimize how much of your money will go directly to the government in the form of capital gains, estate taxes, and even income taxes. 

How much taxes can you expect to save when it comes to funding a charitable remainder trust

Be prepared for what you could be on the hook for and take advantage of some of the benefits of a CRT. This detailed breakdown of how this type of arrangement is impacted by taxes will help you know just what to expect. 

Capital Gains in a Charitable Remainder Trust

One of the benefits of a charitable remainder trust is that you can contribute high-value assets to the trust. In turn, these can be sold to fund your irrevocable trust and yield dividends for you or your beneficiaries in the years ahead. 

If you were to sell these assets outright, you might be subject to capital gains taxes, but what about with a charitable remainder trust? 

The good news is that you are protected from capital gains taxes when funding your trust. When you sell long-term appreciated assets within your CRT, you can avoid paying capital gains taxes that the ordinary sale of the property might have been subject to. 

Of course, you can also choose not to donate the full portion of the asset to the charitable remainder trust. Split gifts are a great option if you want to use some of those funds from the sale of the asset in the here and now. Just remember that you may need to pay taxes on the portion you retain.

This comes in handy specifically when you might be considering gifting real estate to your CRT. Capital gains taxes on a property can be quite high, so this is an advantageous way to shield portions of your estate from taxes while contributing to charity.  

Estate Taxes in a Charitable Remainder Trust

In addition to minimizing capital gains taxes, you will also find that you have great benefits when it comes to estate taxes. Charitable remainder trusts are a type of irrevocable trust which comes with some serious benefits for your estate taxes. 

If you have a sizable estate, then you can benefit from removing some of your assets and placing them into a charitable remainder trust. 

In essence, the property that is donated to the irrevocable trust or CRT no longer belongs to you. The assets that are donated to the CRT are considered separate from the overall estate, thereby eliminating the need for your estate to pay taxes on those items. 

This allows those whom you have named as beneficiaries to receive a set distribution without the need to make a direct gift to them. This can benefit your beneficiaries when it comes to paying those pesky taxes on the gift you bestow upon them. 

Income Taxes in a Charitable Remainder Trust

When it comes to income taxes, everyone wants to do what they can to keep more of their hard-earned money in their pocket. To this end, a charitable remainder trust proves to be quite useful. All of the investment income that is a part of the charitable remainder trust is exempt from tax. 

That said, it does not mean there will never be an income tax on the funds included in your CRT. Beneficiaries will need to pay income tax on the payouts they receive from the trust. 

There are several different things at play when it comes to calculating how income tax will be paid on CRT payouts. Most often, it will be taxed as ordinary income if the charitable remainder trust had ordinary income in that tax year. Otherwise, you might be paying capital gains taxes if ordinary income is exhausted. 

This is reason enough to take care not to convert long term capital gain into ordinary income.  Mismanaging the trust assets can backfire.

Despite the need to pay income tax on the payouts, beneficiaries may be able to claim a partial tax deduction on this income. 

Charitable Tax Deductions

Perhaps the most important benefit of funding a charitable remainder trust is the ability to take a tax deduction on assets that you want to give to charity. Some people know they want to include charitable giving in their estate planning and support a charity they love upon their passing. This is a noble idea, but you will not get to fully enjoy the benefits if you wait until your death. 

Instead, you can donate assets or cash to a charitable remainder trust which is tax-exempt when you first form it. In fact, you will not pay taxes on the payouts until beneficiaries start to receive their payments. Payments that come back as a return of capital are tax free.

You will get an immediate tax deduction which is excellent for your finances in the here and now. If you want to maximize your charitable remainder tax deductions right now instead of waiting for your death when you will not fully be able to enjoy them, you may want to consider setting up a CRT to make a donation now. 

Partner with the Experts

If you are considering a charitable remainder trust to maximize your tax benefits, then you need to partner with a company that specializes in this area. Magellan Planning Group can help you create a tax-advantaged trust for your highly-appreciated assets and create a lasting legacy for your beneficiaries and a charity (or charities) of your choosing.

We specialize in comprehensive planning to help you make the most of your finances well into the future. If you are ready to start planning your estate, contact Magellan today to schedule your consultation.