If you have a substantial real estate portfolio, you might wonder how to make the most of it well into the future. A charitable remainder trust (CRT) could be the solution because it’s a tax-advantaged option that yields a source of income for you and your beneficiaries in the times ahead.
Can you contribute to a charitable remainder trust with mortgaged property?
Learn more about the ins and outs of CRTs and mortgaged property in this detailed guide before you decide whether this financial move is right for you.
Can Mortgaged Property Be Included in a CRT?
The first thing you might be wondering is whether you can contribute a property to the charitable remainder trust if you have financed it. Unfortunately, you must fully own the property. All debt needs to be paid off prior to the donation, which means you cannot carry a mortgage on the donated property.
However, that isn’t the only thing you need to know about donating real estate to your trust.
There are some restrictions on the sale of the property that you must adhere to if you want it to be included in a CRT. Most notably, you cannot sell the property to a family member. Other than this stipulation, the restrictions and eligibility requirements to donate real estate to a charitable remainder trust are fairly minimal.
Benefits of Including Real Estate in a CRT
If you’re thinking about including real estate in your charitable giving once your mortgage is paid off, you might be wondering about the specific advantages of a CRT. Compared to selling the property outright and donating the proceeds to the charity of your choice, there are some significant benefits to investing real estate in a charitable remainder trust.
There are inherent tax advantages to putting your house in an irrevocable trust like a CRT. When you donate a property to the trust, you get double the benefits: it lowers your tax liability right away with a deduction for the value of the property and it defers your taxes on the proceeds of the sale. Let’s take a closer look.
Suppose you donate appreciated property worth $250,000 to your charitable remainder trust. While the IRS may not allow you to take a deduction for the full value of the property, you could see substantial savings. In practice, your tax deduction is based on the present value of the remainder interest that is calculated to eventually go to charity. This is a changing formula that includes the payout rate, the federal midterm rate, and the time likely to elapse before a charity actually receives anything.
From here, you can also avoid the taxes on the sale of the property, which is arguably the biggest reason many people contribute to a CRT. You can avoid capital gains taxes this way. Instead of paying taxes on the profit from the sale, you get to retain that money in the irrevocable trust and reinvest it.
Of course, another main benefit of a charitable remainder trust is that it provides a source of income to you or your beneficiaries well into the future. Distributions from the trust can last for a set period or the lifetime of the beneficiary (or both), as long as at least ten percent remains for charitable donations.
The result of both is that you keep more money within the trust to benefit you, your beneficiaries, and the charity that is near and dear to your heart over the years to come.
FAQs about Funding a CRT with Property
Once you’ve paid off the mortgage of your property, funding a charitable remainder trust with real estate can lead to a lot of benefits in the long run. But what else do you need to know before incorporating this into your plan? Here are some answers to FAQs about charitable remainder trusts and real estate.
Can you live on the property after donating it?
No, you cannot live on the property after you have donated it to the trust. The property no longer belongs to you after you sign on the dotted line to contribute it to your CRT. Instead, the trust will retain ownership of the property.
Generally, no one would donate property to a CRT without the intention of selling it. This is the whole point of donating appreciated assets to a CRT: to sell it without incurring the associated taxes and the repayment of any depreciation.
How much does a CRT cost?
There are several costs to consider for a CRT: setup fees, management fees, and appraisals for the value of the real estate donated. Setup fees can range from $3,000 to $25,000 depending on how complex your donations will be. Management fees can range from 0.75 percent to 1.5 percent of the value with minimum fees of $1,500 to $8,000. If you need an appraisal for your property, they can range from $500 to $10,000.
Also, appraisals for property gifted to a charitable trust must include specific IRS forms which must be included with the donor's tax return. The rules can be complicated and are without question stringent, as recent case law has demonstrated.
Make the Most of your CRT with Magellan
If you think donating real estate to a charitable remainder trust is the most advantageous way to create a source of income for you or your beneficiaries, Magellan can help. We provide a comprehensive service for estate, financial, legal, and tax planning – which means we can help you create a holistic financial plan around the most strategic way to pay off mortgaged properties before using them to fund a charitable remainder trust. Our services act as a one-stop shop for everything you need.
Reach out to us today to learn how we can help you make the most of a real estate donation!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.