Estate Planning for the Ultra Wealthy

Lesson 26: Example: Funding a Charitable Remainder Trust (CRT) with $10M in Appreciated Stock

Introduction

In this lesson, we will explore how to fund a Charitable Remainder Trust (CRT) with $10 million in appreciated stock. This strategy is particularly useful for ultra-high-net-worth individuals looking to achieve both philanthropic goals and tax benefits. We'll delve into the mechanics, benefits, and considerations of this approach.

For an in-depth guide on estate planning, consider reading Estate Planning for the Ultra-Wealthy.

What is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust (CRT) is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by dispersing income to the trust beneficiaries for a specified period and donating the remainder to a designated charity. CRTs come in two forms: Charitable Remainder Annuity Trust (CRAT) and Charitable Remainder Unitrust (CRUT).

Note: For further details on CRTs, refer to our Tradeoffs of Charitable Remainder Trusts (CRT) lesson.

Case Study: Funding with $10M in Appreciated Stock

Consider a client who owns $10 million in appreciated stock. By funding a CRT with this stock, the client can achieve several objectives:

Receive an income stream for a specified term or for life.
Avoid immediate capital gains tax on the sale of the appreciated stock.
Claim a charitable income tax deduction.
Support charitable causes.

Mechanics of the CRT

Upon transferring the $10 million in appreciated stock to a CRT, the trust can sell the stock without incurring capital gains tax due to its tax-exempt status. The proceeds from the sale can then be reinvested to generate income for the trust beneficiaries.

Steps to Fund a CRT with Appreciated Stock

Transfer appreciated stock to the CRT.
CRT sells the stock, avoiding capital gains tax.
Proceeds are reinvested by the CRT.
CRT pays an income stream to the specified beneficiaries.
Remainder is transferred to the designated charity at the end of the trust term.

Flow Diagram for CRT Funding

graph TD A["$10M Appreciated Stock"] --> B["Transfer to CRT"] B --> C["CRT Sells Stock"] C --> D["Avoids Capital Gains Tax"] D --> E["Reinvest Proceeds"] E --> F["Income Stream to Beneficiaries"] E --> G["Remainder to Charity"]

Benefits of Funding a CRT with Appreciated Stock

There are several benefits to funding a CRT with appreciated stock:

Tax Efficiency: The stock can be sold without incurring capital gains tax.
Income Stream: The trust provides an income stream to the beneficiaries.
Charitable Deduction: The donor receives a charitable income tax deduction based on the present value of the remainder interest that will eventually go to charity.
Philanthropic Impact: The remainder of the trust assets will benefit the charity of choice.

Considerations and Tradeoffs

While there are many benefits, there are also considerations and tradeoffs to be aware of:

For further reading on estate planning strategies, check out Advanced Estate Planning Techniques.

Irrevocability: Once the assets are transferred to the CRT, the transfer is irrevocable.
Complexity: CRTs can be complex to set up and administer, requiring the guidance of experienced estate planners and tax advisors.
Income Variability: Depending on the type of CRT (CRAT vs. CRUT), the income stream may vary.

Tax Implications and Benefits

Funding a Charitable Remainder Trust (CRT) with appreciated stock can offer significant tax advantages. Here are some key tax implications and benefits:

Capital Gains Tax Avoidance: By transferring appreciated stock to the CRT, the donor avoids immediate capital gains tax on the sale of the stock.
Income Tax Deduction: The donor is eligible for a charitable income tax deduction based on the present value of the remainder interest that will eventually go to charity.
Estate Tax Reduction: Assets transferred to the CRT are removed from the donor's taxable estate, potentially reducing estate taxes.

Illustrative Example

Let's consider the practical implications of funding a CRT with $10 million in appreciated stock through a step-by-step illustration:

graph TD A["Donor with $10M in Appreciated Stock"] --> B["Transfer Stock to CRT"] B --> C["CRT Sells Stock (No Capital Gains Tax)"] C --> D["Reinvest Proceeds"] D --> E["CRT Pays Income to Donor or Beneficiaries"] E --> F["Income Tax Deduction for Donor"] F --> G["Remainder to Charity"]

Calculation of Charitable Deduction

To calculate the charitable income tax deduction, the following formula is typically used:

\[ \text{Charitable Deduction} = \text{Fair Market Value (FMV) of the Asset} - \text{Present Value of the Income Stream} \]

For instance, if the FMV of the asset transferred to the CRT is $10 million and the present value of the income stream to the donor or beneficiaries is $6 million, the charitable deduction would be:

\[ \$10,000,000 - \$6,000,000 = \$4,000,000 \]

Comparison with Private Placement Life Insurance (PPLI)

When choosing between CRT and Private Placement Life Insurance (PPLI), consider the following:

graph LR A["Charitable Remainder Trust (CRT)"] --> B["Income Stream"] A --> C["Charitable Deduction"] A --> D["Avoid Capital Gains Tax"] A --> E["Complex Trust Administration"] A --> F["Irrevocable"] X["Private Placement Life Insurance (PPLI)"] --> G["Income Tax-Free Death Benefits"] X --> H["Tax-Deferred Growth"] X --> I["Investment Flexibility"] X --> J["Premium Costs"] X --> K["Policy Management"]

For more detailed comparisons and examples, refer to our Examples of When to Use Private Placement Life Insurance (PPLI) vs. Charitable Remainder Trusts (CRT) lesson.

Conclusion

Funding a Charitable Remainder Trust (CRT) with $10 million in appreciated stock can be a powerful strategy for ultra-high-net-worth individuals. It provides tax efficiency, an income stream, and substantial philanthropic benefits. However, it is crucial to weigh the tradeoffs and considerations with the help of experienced estate planners and tax advisors.