Magazine article Journal of Property Management

Charitable Remainder Trusts and the Property Manager

Magazine article Journal of Property Management

Charitable Remainder Trusts and the Property Manager

Article excerpt

"I wish I could sell my property, but the taxes would kill me!"

Your client, frustrated by the years of minimal cash flow looks at you with a hopeful expectation for inspiration. "What can I do to generate some cash flow from this property?"

Enter the charitable remainder trust (CRT). The CRT has existed as a tax alternative to selling an asset for many years, but few real estate professionals have ever heard of it. Gaining a thorough understanding of the CRT will give you a financial disposition strategy that could save your clients hundreds of thousands of dollars (or millions for that matter), help a charitable institution provide valuable service to society, and solidify your position in your client's eyes as a true financial professional.

Understanding CRTs

The concept behind a charitable remainder trust is to avoid both income and estate taxes, while benefitting a charitable organization. Upon making a gift to an irrevocable CRT, the donor (property owner) is entitled to a charitable income-tax deduction in an amount equal to the present value of the future gift (remainder interest). This remainder value is generally determined by an IRS formula. Because the transferred property will often be sold by a not-for-profit charity, the sale is not subject to a capital-gains tax, and the donor/owner avoids any capital-gains taxation on the property.

In creating a CRT, the donor/owner gives the property to a charity, but retains the rights to income for his or her lifetime and that of a surviving spouse. Trusts may also be created for a specified number of years (no more than 20 years). This income is paid out to the donor/owner or to another designated party at least annually. By IRS regulation, this income must be at least 5 percent of the value of the donated asset. Upon the death of the donor or the end of the specified trust term, the remainder value reverts to the charity.

In fact, there are two basic types of CRTs - an annuity trust and a unitrust. Under an basic annuity trust, the donor receives a fixed amount each year; while under a unitrust, the donor receives a fixed percentage of the asset's annual value (based on an appraisal in the case of real estate). One or the other plan must be selected at the time the trust is drafted.

Once the property is donated, the donor/owner may serve as a trustee for that property and retain management control. However, no fee may be charged for this management service. Instead the donor/owner may elect to turn over management of the property to a third party.

In addition to enjoying the benefits of income from a CRT, donors of appreciable properties, such as real estate, may also take advantage of a wealth replacement plan to ensure that their heirs receive benefit from the donated property. Under such a plan, appreciated property is given to a CRT with the expectation that the property will be sold and the income will be reinvested in securities with a higher annual yield than the property.

At the same time, another (non-charitable) trust is established to benefit children or other heirs. This trust purchases a life insurance policy on the donor/owner, which will replace the value of the property that would have passed to the donor's heirs. The policy can be in any amount chosen by the donor/owner.

The income tax savings that result from the charitable gift and/or the increased after-tax income realized by the donor/owner is used to pay the premiums on the life insurance. When the donor/owner dies, the proceeds of the life insurance policy pass to the heirs without transfer tax. …

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