Estate planning can feel like navigating a labyrinth of complex legalities and tax codes. On this episode of A Wiser Retirement™ Podcast, Casey Smith is joined by guest Shawn Shelton, partner at Moore Ingram Johnson & Steel to explain Charitable Remainder Trusts (CRTs), as a strategic tool for those with estates valued over the $25 million federal estate tax exclusion.
The amount of money one can give during their lifetime or at the time of passing has increased in 2023 to $12.9M. So, a couple with assets of $25M or under can gift their money tax-free. However, any couple with assets above $25.8M are over the exclusion limit, and therefore have taxes due on their estate. Unfortunately for many, this exemption is going away in 2026. We estimate that the change will decrease that number to somewhere between $6.5M to $7.5M, which would be around $14 to $15 million per couple. This increases the number of Americans who could be looking at potential estate tax liability.
Understanding the Charitable Remainder Trust
Assuming a family has assets that have highly appreciated. Examples of this could Apple stocks bought as an IPO in the 80s, or they have a business that has succeeded and appreciated in value, or even real estate. This family is charitable in nature and wants to help others since they have plenty of resources for themselves. They come to Wiser, and raise the concern that their assets stand above the exclusion limit, so they need estate planning done.
One of the options is the charitable remainder trust. In this trust, some of the low-basis assets are taken and then transferred to an irrevocable trust. The remainder trust is in the Internal Revenue Code, containing documents by the IRS. In a split-interest trust, you have a lead beneficiary who receives an income stream either for a period of years (up to 20 years) or for the life of an individual. The remainder beneficiary receives it when that period ends, or when that person passes away.
Therefore, in a charitable remainder trust, the remainder beneficiary can be a charity, and the lead beneficiary is usually the grantor or the person who set up the trust. They can take some of the low-basis highly appreciated assets and transfer them to the trust since the trust itself is tax-exempt. The trust can then have a diversified portfolio, and sell the assets without having to immediately pay income tax on it.
In this case, income tax doesn’t go away because there’s also a stream of income that is paid out to the grantor, which can be done as an annuity trust or a unit trust. An annuity trust pays a fixed dollar amount from the trust every year. The unit trust pays a fixed percentage of the value of the trust assets, and the trust’s assets need to be revalued every year. This may increase or decrease payment depending on the investment performance of the trust itself. Consequently, when that portfolio is liquidated and the trust diversified, the trust itself doesn’t pay income tax. Nonetheless, the distributions that are going out to the grantor or the lead beneficiary are includable in their income. Then the nature of that income depends on the nature of the income for the trust.
Double-Check with Trusted Professionals if This is Right for You
Many people have concerns about creating a charitable remainder trust and ending up not leaving enough money to their own families. If they are in good enough health, a life insurance policy can always help solve that problem. So, an option would be to open the remainder charitable trust after you have qualified for a life insurance policy. It is also crucial that you consult with your financial advisor and CPA. They can help you understand what the implications of opening a charitable trust will be to you immediately, and to your family in the future.
A Donor-Advised Fund is a Simpler Way to Donate Money
If a charitable remainder trust, is not for you, keep in mind that there are other ways to donate money. For example, a donor-advised fund. These funds are a much simpler way of donating money, because you don’t need to have a lot to do it. As opposed to the remainder charitable trust, which requires you to be above the exemption limit. Donor-advised funds exist for every-day families who want to teach their children or grandchildren the principle of charity.
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