Yes, you absolutely can establish a charitable remainder trust (CRT) using appreciated stock, and it’s a strategy frequently employed by individuals looking to maximize both charitable giving and potential tax benefits. A CRT is an irrevocable trust that provides an income stream to the donor (or other designated beneficiaries) for a specified period, with the remainder going to a qualified charity. Utilizing appreciated stock avoids immediate capital gains taxes that would be triggered if the stock were sold directly, allowing more of the asset’s value to be directed toward charitable goals and income for the donor. Approximately $39.89 billion was given to charity in 2023, with a significant portion facilitated through planned giving vehicles like CRTs, highlighting the popularity of this method.
What are the tax benefits of using stock in a CRT?
The primary tax benefit lies in the ability to deduct the present value of the remainder interest—the portion of the trust that will eventually go to charity—on your income tax return for the year the trust is established. This deduction is subject to certain limitations based on your adjusted gross income and the type of property contributed. More importantly, by donating appreciated stock—assets that have increased in value since their original purchase—you avoid paying capital gains taxes on that appreciation. For example, if you purchased stock for $10,000 and it’s now worth $50,000, directly selling it would trigger a capital gains tax on the $40,000 profit. By transferring it to a CRT, you sidestep that tax liability. It’s estimated that avoiding capital gains taxes can increase the amount available for charitable giving and income by as much as 20-30%.
I remember working with a client, Mr. Henderson, a retired engineer, who had a substantial portfolio of tech stock. He was passionate about supporting his local university but worried about the tax implications of a large gift. He’d accumulated stock over 20 years, and the potential capital gains tax was a serious deterrent. He was hesitant to make a significant donation, fearing it would drastically reduce his retirement income. The situation was compounded by his distrust of complex financial instruments, making a simple cash donation seem like the only viable option.
What types of CRTs are available and which one is best for me?
There are two primary types of CRTs: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). A CRAT provides a fixed annual income to the beneficiary, determined at the trust’s creation. This amount remains consistent regardless of the trust’s investment performance. A CRUT, on the other hand, pays out a fixed percentage of the trust’s assets, revalued annually. This means the income can fluctuate depending on market conditions and the trust’s investment performance. A CRUT generally allows for more flexibility and can be a better option if you desire potential income growth. According to a recent study by the National Philanthropic Trust, CRUTs account for roughly 65% of all CRTs established, due to their adaptability. “Choosing the right type of CRT depends on your individual financial goals, risk tolerance, and desired level of income stability,” as often advised during initial client consultations.
What happened with Mr. Henderson and his stock donation?
After a series of detailed discussions, we determined that a CRUT was the ideal solution for Mr. Henderson. We structured the trust to receive a diversified portfolio of his appreciated tech stock. The CRUT was designed to pay him a fixed percentage of the trust’s value each year, providing him with a reliable income stream during retirement. By transferring the stock to the CRUT, he avoided paying capital gains taxes on the $300,000 in appreciation. The university received the remainder of the trust assets after his lifetime. He was delighted. He shared that knowing he’d supported the university and simultaneously minimized his tax burden brought him a sense of profound satisfaction. “It’s not just about the money,” he told me. “It’s about making a lasting impact.”
Establishing a CRT with appreciated stock requires careful planning and professional guidance, but it can be a powerful tool for achieving your charitable and financial goals. It’s a win-win scenario: you support a cause you care about, potentially reduce your tax liability, and create a lasting legacy.
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About Steve Bliss at Escondido Probate Law:
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