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Articles: Where to transfer your wealth? The CRT option

An estimated $41 trillion in wealth will be transferred by the midpoint of this century.  Where will your share of the spoils go? If you own property that has appreciated in value say, a business interest or rental real estate you might opt to use a charitable remainder trust (CRT).

In fact, due to the uncertainty surrounding the estateand gift-tax rules after 2012, CRTs may deserve a closer look from high-income individuals right now.

How it works:  You transfer the appreciated property to the CRT and designate a beneficiary to receive income from the trust for life or a period of years.  For instance, you might name your spouse as the income beneficiary of the trust.

The beneficiary pays tax on the amounts received from the trust.  At the end of the trust term, the property goes to the charity named at the outset.

This can accomplish both long-term and short-term objectives.  For instance, these are just some of the benefits you might realize from a CRT:

A donor can claim a current tax deduction for the value of the remainder interest that passes to the charity.  The value of the donation is based on special government tables.

 The donor may also avoid a potentially large capital gains tax on the sale of appreciated property.  Note:  The maximum rate on long-term capital gain is scheduled to increase from 15% to 20% next year.

The designated beneficiary can rely on a steady stream of income from the CRT to sustain him or her in retirement.

The CRT may be combined with a “wealth replacement trust” to achieve additional estate-planning benefits.

A wealth replacement trust is funded in whole or in part by the tax savings generated by the CRT.  The trust then uses the money to purchase life insurance to replace the wealth that the owner is donating to charity.

When all is said and done, your heirs may come out even or ahead of where they would have been if you had not set up the CRT in the first place.  Because favorable estateand gift-tax provisions are scheduled to expire after 2012, there is a special incentive to act this year.

Although there are several variations, the two main types of charitable remainder trusts are CRATs (charitable remainder annuity trusts) and CRUTs (charitable remainder unitrusts). No matter which one you use, the income beneficiary must be entitled to an annual payment each year for life or for a period of no more than 20 years.

With a CRAT, the payment must be a fixed amount at least equal to 5% of the initial value of the trust property, while a CRUT requires payment of a fixed percentage (not less than 5%) of trust assets. In either event, a trust will not qualify as a CRT if the annual payout exceeds 50%.  Furthermore, it must be clear that the charity will receive at least 10% of the donated assets from the CRT.

Finally, be aware that a charitable remainder trust is irrevocable. In other words, you can’t change your mind and take your assets back once you have made the transfers.  Also, there are fees for establishing and maintaining the trust.

Of course, the CRT concept is not for everyone.  When it makes sense for your situation, coordinate a CRT with other aspects of your estate plan.  Your professional advisor can provide valuable guidance.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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