Handling real estate can be complicated when it comes to capital gains taxes and expenses that you may not have expected. If you want your real estate to serve as a form of generational wealth for yourself or your beneficiaries, you might want to consider donating it instead of selling it outright. Real estate can be used to fund a charitable remainder trust that provides payouts for years to come with quite a few tax advantages.
Before you decide to sell that piece of property, here’s what you need to know about investing it in CRTs instead.
What Are Charitable Remainder Trusts?
Charitable remainder trusts are an excellent way to ensure your assets create generational wealth for your beneficiaries. CRTs allow you to donate your assets to a tax-sheltered account where your beneficiaries and a charity of your choosing can reap the rewards of your assets.
Whether you choose a charitable remainder annuity trust (pays beneficiaries set dollar amounts each year) or a charitable remainder uni-trust (payment percentage is fixed), both have tax advantages for holding assets.
Instead of funding your investment account with hard cash, you can fund a charitable remainder trust with assets. Real estate is a great option because you can fund your CRT with a combination of residential real estate, commercial real estate, and even raw land.
If you decide to sell your real estate outright, chances are that you will owe capital gains taxes and will lose a hefty chunk of what the property was worth. Even if you do decide to invest the proceeds for the years ahead, you may lose some of the real value of the asset. However, when you sell those assets within the trust, you can benefit from significant tax advantages.
CRAT vs CRUT: Which is Better for Real Estate?
While both charitable remainder annuity trusts (CRAT) and charitable remainder uni-trusts (CRUT) have advantages for you, your beneficiaries, and the charity of your choosing, which one is best if you intend to fund it with real estate?
In general, a CRUT is the better investment vehicle if you intend to sell real estate to fund the trust, because it is a little more flexible.
In many cases, the sale of real estate may not be able to take place immediately. A NIMCRUT may be the best investment vehicle for this type of donation because it does not require you to take a trust distribution until there is income for the trust. Unlike CRATs which require distributions effective immediately, there are different types of CRUTs that do not.
Keep in mind that there is the potential for the trust to become disqualified if you enter into a CRAT and do not take the distributions.
Why Fund a Charitable Remainder Trust with Real Estate?
For many people who own lots of property, they might be wondering why it’s better to fund a charitable remainder trust with real estate instead of the proceeds of the sale of said real estate.
In fact, selling your property within the confines of the trust is a savvy financial move. Gift the property to the CRT, at which point the CRT can facilitate its sale.
This helps you avoid any capital gains tax that the sale of that property might have incurred. If you do not want to donate the entirety of the property’s value into the charitable remainder trust, you can also use split gifts. This allows you to give a portion of the property instead of the full amount.
The benefits of funding a charitable remainder trust with real estate include:
- Tax deductions for the donated real estate and other assets that you contribute
- Deferred tax on the funds that are distributed
- You or your beneficiaries can receive payouts from the trust for a set period or for a lifetime until the trust is depleted and the remainder is given to charity
How to Sell Real Estate with a CRT
If you’re ready to move forward with donating your real estate to a CRUT, then the next step is confirming your eligibility to do so. While the requirements for this type of donation are relatively minimal, make sure you meet the standards set:
- You must fully own the property
- All debt on the property must be paid off prior to the donation
Similarly, there are restrictions on who you can sell the property to and where you can live in the aftermath of the donation. The property cannot be sold to a family member and you cannot remain living in the property after you have donated it to the trust.
Note that you cannot sell the property prior to placing it in the CRUT if you want the inherent tax advantages of the real estate donation. You will direct the sale after it has been donated, but it cannot be donated retroactively.
Invest Your Real Estate with Confidence
Estate planning that makes the most of your real estate and other assets is no simple process. Partnering with experienced professionals and fiduciaries can give you peace of mind knowing that your generational wealth is protected in safe, smart ways.
Magellan Planning Group can guide you through the process of setting up a CRT and deciding which of your assets you want to use to fund it. If this sounds like the savviest financial move for your future or the future of your beneficiaries, contact us today to learn more!