Two major goals for many estate planners are charitable donations and reducing liability for capital gains tax. A charitable remainder trust can help individuals achieve both of these goals. Also known as a “CRT,” a charitable remainder trust, as the Florida House on Capitol Hill explains, may provide a number of additional benefits, such as tax deferments, tax deductions, and financial security for beneficiaries. The specific benefits of this strategy depend on the unique circumstances of each estate planner, as well as specific jurisdictional regulations. To learn more about whether a CRT might be the right choice, consider speaking with an experienced estate planning attorney. Call (713) 346-2011 in Texas or (305) 900-3139 in Florida to speak with the dedicated tax and estate planning attorneys at Fleurinord Law, PLLC today.
What Is a Capital Gain
One of the key benefits of a charitable remainder trust is the avoidance of capital gains tax. A capital gain is income generated from an investment. Investors experience a capital gain when the value of their capital assets increase in value. There are many examples:
- Stocks
- Bonds
- Real estate
- Art
- Collectibles
A capital gain occurs whenever someone sells property for more than the initial purchase price. Capital gains taxes only occur when the investor sells assets. Avoiding capital gains tax is important for individuals whose portfolios encompass substantial investment assets, and it may be especially critical for retired individuals who depend on capital gains in place of regular income.
Capital Gains Taxes in Florida and Texas
According to the Tax Foundation, there is no individual state income tax in Florida or Texas. By extension, these states also have no capital gains tax. In addition, there is no estate tax or inheritance tax in Florida or Texas. That being said, the federal government still taxes capital gains.
Federal Capital Gains Tax
The federal government calculates capital gains tax based on different schedules. These are calibrated according to two categories:
- Short-Term Capital Gains: Capital gains are short-term if they were held for less than a year. Expect higher tax rates for these capital gains.
- Long-Term Capital Gains: Property held for at least one year leads to long-term capital gains taxes. Expect lower tax rates for these investments.
Short-Term Capital Gains Tax
The federal government taxes short-term capital gains in exactly the same way as normal income. For a single person, the tax rate varies from 10% for under $9,950 to 37% for over $523,601. Married couples filing jointly get the same tax rates, but the tax threshold is doubled.
Long-Term Capital Gains Tax
Long-term capital gains taxes range from 0% to 20%. A single person experiences a 0% rate for capital gains under $40,400, or $80,800 for a married couple. For capital gains between $40,401 and $445,850, the capital gains tax is 15%. Married couples also experience a 15% rate for capital gains between $80,801 and $501,600. Single individuals experience a 20% rate for capital gains of over $445,851, and that rate applies to gains of over $501,601 for married couples.
A single person, or a married person filing separately, who sells stocks and generates a $500,000 profit, would typically incur a 20% capital gains tax at the federal level in the year of the sale. However, some federal tax laws do provide opportunities to limit liability for capital gains tax. Individuals who are concerned about incurring a steep capital gains tax may wish to discuss options alongside a qualified Florida estate planning and tax attorney. Call Fleurinord Law, PLLC to learn more about potential strategies.
An Overview of Charitable Remainder Trusts
A charitable remainder trust is a type of irrevocable trust, which means that it cannot be altered or canceled by the grantor once established. As the name implies, a CRT is charitable in nature. This means that eventually, the remaining assets held in the trust must go toward a charity, selected ahead of time by the grantor.
How Does a Charitable Remainder Trust Help Avoid Capital Gains Taxes?
Along with the ethical and moral benefits of leaving assets to charity, a CRT also offers a range of financial benefits to its grantor and beneficiaries. Perhaps the most notable is the fact that there are no capital gains taxes once assets are contributed to a CRT. The result is that a grantor may hold millions of dollars in stocks, and if the grantor contributes these stocks to a CRT, they can sell their investments without incurring capital gains taxes. They can also reinvest and diversify assets without triggering those same taxes.
Charitable Remainder Trusts Offer Additional Benefits
Other than the avoidance of capital gains taxes, CRTs offer additional benefits:
- There may be income tax deductions associated with charitable donations
- A CRT can generate interest in the same manner as a variable or fixed annuity
- A CRT can provide financial security for children after the passing of the grantor
- A CRT provides income to grantors and beneficiaries
Charitable Remainder Trusts and Generating Interest
CRTs generate interest in different ways depending on their type. There are two main categories:
- Charitable Remainder Unitrusts: Also known as a “CRUT,” a charitable remainder unitrust generates interest based on the value of the trust principal calculated each year. This is similar to a variable annuity, and the interest rate varies.
- Charitable Remainder Annuity Trusts: Also known as a “CRAT,” a charitable remainder annuity trust also generates income. However, the amount of this income is fixed based on the initial contribution. A grantor who contributes $500,000 when establishing the trust with a 5% rate would receive $25,000 for all subsequent years. This is similar to a fixed annuity, and the interest rate remains constant.
The Disadvantages of a Charitable Remainder Trust
The main disadvantage of a charitable remainder trust is the expectation that at some point the remainder of the assets will go to charity. However, many grantors might actually see this as a benefit rather than a disadvantage; many affluent individuals hope to craft a legacy that will improve the world they leave behind. In addition, it is theoretically possible for a charitable remainder trust to last a very long time, providing income for numerous generations of beneficiaries. Grantors do also have some control over the percentage of the assets held in the trust that will be paid to charity.
Speak With an Estate Planning Attorney Today
Estate planners in Florida or Texas can speak with an experienced tax and estate planning attorney at Fleurinord Law, PLLC to explore the tax advantages of charitable remainder trusts in more detail. Although this strategy can certainly help avoid capital gains tax, a charitable remainder trust to avoid capital gains tax may work best as part of an overall investment and estate planning strategy designed to minimize tax liability. Discussing options alongside an experienced estate planning attorney allows individuals to select the best possible choice based on their unique circumstances. Reach out today and call (713) 346-2011 in Texas or (305) 900-3139 in Florida to get started.