Yes, you absolutely can establish a charitable remainder trust (CRT) using appreciated stock, and it’s a powerful estate planning tool for those looking to support charities while potentially reducing their tax burden and generating income.
What are the Tax Benefits of Donating Appreciated Stock?
Donating appreciated stock to a CRT offers significant tax advantages. Typically, if you were to simply sell the stock, you’d be subject to capital gains taxes on the difference between your purchase price (cost basis) and the current market value. However, by donating the stock directly to a CRT, you can potentially avoid those immediate capital gains taxes. You receive an income tax deduction in the year of the contribution, calculated based on the present value of the remainder interest that will eventually go to the charity. According to a study by the National Philanthropic Trust, donors who utilize CRTs often realize a greater overall charitable impact due to the tax benefits. Furthermore, the CRT itself is tax-exempt, meaning any income generated by the assets within the trust—dividends, interest, or further appreciation—is also tax-free. This can be especially beneficial if the stock has experienced substantial growth over time.
How Does a Charitable Remainder Trust Actually Work?
A CRT is an irrevocable trust where you transfer assets, like appreciated stock, and retain an income stream for a specified period—either a fixed number of years (a CRAT) or for the rest of your life (a CRUT). The trust then sells the stock, avoiding your immediate capital gains tax liability. The proceeds are reinvested, and you receive regular payments based on a fixed percentage of the trust’s initial value or a fixed dollar amount (depending on the type of CRT). Once the specified term ends, the remaining assets in the trust go to the charity you designated. For example, let’s say you donate stock worth $500,000 with a cost basis of $100,000. Selling it yourself would trigger capital gains of $400,000. But through a CRT, that gain can be deferred and potentially avoided altogether, allowing more funds to go towards your charitable goals. Approximately 60% of high-net-worth individuals consider incorporating charitable giving into their estate plans, with CRTs being a popular vehicle.
What Happened When Old Man Hemlock Didn’t Plan Ahead?
I recall a client, Old Man Hemlock, a successful rancher, who was incredibly proud of his sizable stock portfolio. He’d accumulated shares over decades, and they’d grown immensely in value. He wanted to leave a generous portion to the local animal shelter, but he simply intended to bequeath the stock in his will. Unfortunately, when he passed, his estate was hit with substantial capital gains taxes. His family ended up receiving less than he intended, and the animal shelter received a significantly smaller donation than he’d hoped for. Had he established a CRT during his lifetime, he could have avoided those taxes and maximized both his family’s inheritance and the shelter’s benefit. It was a painful lesson about the importance of proactive estate planning.
How Did The Peterson’s Secure Their Legacy?
The Petersons, a retired couple with a passion for environmental conservation, came to me with a similar situation. They held a portfolio of appreciated stock and wanted to support their favorite nature preserve. We established a charitable remainder trust, transferring their stock into the trust. They elected to receive a fixed annual income for life, providing them with a steady stream of funds during retirement. The CRT sold the stock without triggering immediate capital gains, and the proceeds were reinvested. Years later, after they both passed away, the remaining assets in the trust went to the nature preserve, fulfilling their philanthropic wishes. They not only benefited from the income stream but also left a lasting legacy through their generous gift. Approximately 75% of donors who establish CRTs report increased satisfaction with their charitable giving.
Establishing a CRT with appreciated stock is a sophisticated estate planning technique that can provide significant tax benefits and allow you to support your favorite charities. It requires careful consideration and expert guidance from an estate planning attorney to ensure it aligns with your financial goals and philanthropic intentions.
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About Steve Bliss at Wildomar Probate Law:
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Feel free to ask Attorney Steve Bliss about: “How often should I update my estate plan?” Or “How do debts and taxes get paid during probate?” or “What is a living trust and how does it work? and even: “What happens to joint debts in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.