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Is a Charitable Remainder Trust for You?

charitable remainder trust

Did you know that you could sell a business or a highly appreciated asset and not pay a dime in taxes? I know what you are thinking. Yes, it does sound too good to be true. However, this is not one of those cases. It is absolutely possible with a charitable remainder trust. Check out this video to find out how! 

I had a client that was selling their business for a hefty price. They were going to make an outstanding profit from the sell. With a nice yield coming from unloading the company, the client was frustrated by the total amount of taxes they would be accountable to pay.  So we immediately sprung into action, meeting with their CPA and attorney, to see what, if any tax break we could utilize to minimize this client’s tax burden. After all our planning, we were able to reduce the taxes to $0 AND drop this year’s taxes so far down that we were able to pull money out of their IRA, further diminishing the taxes on that as well. You are probably thinking, “how in the world?”

We chose to utilize a Charitable Remainder Trust or a CRT. This particular tool was perfect for our client, who is a philanthropic person. That character trait is a must for using a CRT. The most significant downside to these is the fact that they are irrevocable, meaning once they are in place, there is no going back. Once you make that decision, you can’t change it. For this client, they were in their mid-60s with about a 25-year life expectancy. The numbers and their overall financial wellbeing made this irrevocable planning tool a great way to maximize the benefits of using a charitable remainder trust. So what is a CRT?

The first thing to make a note of is that a charity is involved. Basically, a CRT means that in the future a charity will receive the asset. This tool is extremely complicated. However, for the purpose of this post, I am giving an overview and simplifying the benefits they may offer. 

In short, our client gave their business to a charity. Being they are a legal charity, the charity is not liable for paying any taxes. So once he gave the business to them, the charity and our client entered into an agreement that stated the client would receive income from the asset for the remainder of their life—thus a charity remainder trust. Because it is a trust, that means it is outside of the estate. Again, these are complicated, but to simply state it, the client gave the business to the charity, which in turn sold the business, paying $0 in taxes. Then based on the agreement the full value of the business went into an account for the charity, in which our client can receive income for the rest of their life. WOW! That is pretty powerful!

Let’s walk through the numbers. We will assume the business is worth $1 million. Many times the taxes can be a whopping $200k to $400k. Possibly, even more, depending on the breakdown of the actual tax classification. For this example, we’ll say the taxes were 30%, making that $300k of the million. Well, because of the charitable remainder trust, he did not pay that. Instead the full $1 million is inside of the account.

Not only that, but he also received a substantial charitable deduction on their taxes now, thereby reducing his taxes significantly; so much so that we were able to pull out some of his retirement money further decreasing his overall tax burden. In this client’s case, we only need about 3% distribution, or $30k, from the $1 million sale.  That meant the trust easily provided that 3% for the rest of his life. That means instead of only being able to take 3% of $700k (the after-tax amount if he sold his business outright), he was now taking 3% of a million. In this case, it was a fantastic tool.

So guys, listen. If you’re contemplating selling your business, a piece of real estate or another highly appreciated asset, then a charitable remainder trust very well could save you hundreds of thousands of dollars and provide a nice income stream, all while minimizing your taxes—possibly even no taxes at all! Life is hard. Business is complicated; especially when it comes to planning something of this nature. Let’s work together to make your life and taxes at least financially simple. Contact us now if you want to learn more about what tools might be right for you.

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