If you’re a business owner looking to sell your business and retire, may incur substantial capital gains tax on the sale of your company stock. If you want to eliminate these taxes and benefit your favorite charity, a Charitable Remainder Trust (CRT) could be the perfect retirement planning tool for you. A CRT allows you to convert the value of your business to lifetime income, eliminate capital gains taxes, and contribute to your favorite charity – all through one structure.
In a CRT, you transfer an appreciated asset to a charitable trust, and the trust sells the asset to a third party. Because the trust is a charitable entity, there is no capital gains tax due on the sale. The trust then pays a percentage of the trust funds to you for the rest of your life, and if desired, for the life of another family member. Not only do you avoid capital gains taxes, but you are entitled to a charitable deduction against your income taxes in the year the asset is transferred to the trust.
The CRT is particularly beneficial in the wake of the American Taxpayer Relief Act of 2012 (ATRA), which was enacted at the beginning of 2013. The legislation increased the tax rate on capital gains to 20% for those earning $400,000 (or $450,000 for married couples). At the same time, tax provisions of the Affordable Care Act added a 3.8% surtax onto net investment income, including capital gains, for those making over $200,000 (or $250,000 for married couples). The combination of these taxes results in a hefty tax rate on capital gains of 23.8%. Even if your annual income doesn’t usually reach $400,000, the sale of a substantial asset, such as your business, can push your income into the highest tax bracket just for that year – triggering the both the higher 20% capital gains tax rate and the 3.8% surtax on investment income.
There are numerous ways to design a CRT to meet your individual needs. The structure of a CRT is fairly flexible, and you should talk with your lawyer about designing a structure that will best satisfy your income needs, provide for your family, and fulfill your charitable goals.