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The Incredible Charitable Remainder Trust

mark levine money retirement May 03, 2009
giving money

by Mark Levine

photo via pixabay 

The charitable remainder trust is one of the secret wonders of financial planning

Quite simply, it can help you make more money by giving it away.

I’m going to let you in on a closely held secret of the very wealthy—sometimes you can make more money by giving away something than you can by keeping it. Case in point: the charitable remainder trust.

The charitable remainder trust is one of the secret wonders of financial planning. Don’t let its name scare you off. Not solely a device for wealthy philanthropists, it can be an incredible income-generating tool for anyone who owns an asset that has appreciated a great deal but isn’t generating sufficient income. Or anyone who could simply use a substantial tax break. Let me explain how they work.

An Underperforming Asset

Say you own a piece of property, a stock portfolio or a business that has dramatically increased in value since you bought it, but which does not produce as much income as you’d like. For argument’s sake—and to make the magic of this technique more obvious—let’s say this asset is worth $1 million. (Don’t worry: The math works just about the same for any lesser amount, only the tax savings aren’t as dramatic.)

Avoiding Taxes, Enhancing Income

Let’s assume you are the kind of person who wants to get the most out of life by living up to—not beneath—your means, which includes spending on yourself as well as your loved ones. Let’s also assume you could use some increased income to maintain your lifestyle and to continue helping out your kids.

You’ve got this asset worth $1 million, but it’s only generating a 2 percent annual income. If you sell it, you must pay capital gains tax based on its appreciated value—far greater than what you paid 20 years ago. For example, if you own a $1 million asset that had a negligible starting value, you could end up keeping less than $850,000 after the federal, state and local governments get their cuts.

Take that $850,000 and invest it in something that pays a decent rate, say 6 percent, and you’ll end up with an annual income of $51,000 from your $1 million asset. If you pass along this asset to your kids, that $850,000 would be subject to around a 50 percent estate tax, leaving your heirs with $425,000—a nice sum only if you forget the original asset was worth $1 million.

Okay, now let’s see what would happen if you instead gave away the asset through a charitable remainder trust. You take your asset and give it to a trust, which sells the asset for $1 million. You instruct the trust to pay you a guaranteed income of 6 percent a year by investing the money. You also instruct the trust to hand the money over to a charity (named or unnamed) when you die. Now, since you don’t have to pay capital gains taxes, you're earning 6 percent of $1 million, or $60,000, rather than six percent of $850,000, or $51,000. You’ve just enhanced your annual income by $9,000.

In addition, you’re entitled to a tax deduction since you’ve given the asset to a charity. The IRS, using actuarial tables and income projections, will estimate the benefit you’ll gain from the asset while you’re alive and subtract it from the asset’s value. The result is the “remainder.” Say the IRS determines that your lifelong benefit from the asset is equal to 50 percent of its value. That means the remainder produces a $500,000 charitable contribution that you can take as an income tax deduction. That gift could result in a tax savings of $175,000 or more, depending on your tax bracket.

The Bottom Line

By giving away the $1 million asset rather than selling it, you’ve not only increased your annual income from $51,000 to $60,000, but you’ve also earned a $175,000 tax savings in the process. Plus, you’ll be Man of the Year at the charity’s annual dinner dance since you’ve given it $1 million on which it won’t have to pay capital gains either. You’re happy. The charity is happy.

For Uncle Sam, it’s a wash: He has lost out on some capital-gains and estate-tax revenue, but that’s theoretically offset by all the good the charity will do with its new $1 million asset. It’s your heirs who have apparently lost out. Sure, that $425,000 inheritance wasn’t a big share of the initial $1 million, but it’s better than nothing, which is what they’ll get when you die if the asset is given to a charity.

But inheritance isn’t the only way to help your children. Sure, you could use that extra income and those tax savings to travel the world. But you could also use them to help your son set up a business, or to help your granddaughter go to medical school. So, even your heirs haven’t necessarily lost out. Incredibly, everyone has done better by giving away an asset, rather than selling it.


Mark Levine co-authored this article with Stephen Pollan. Levine and Pollan are the acclaimed authors of bestselling books including Second Acts: Creating the Life You Really Want, Building the Career You Truly Desire and It’s All In Your Head: Thinking Your Way to Happiness.


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