Law News and Tips
You’ve heard the expression, “It’s better to be lucky than to be good?” Well, John was lucky. He was good too, but the lucky part was the biggest thing. But being a religious guy, he knew that luck had nothing to do with it. More on that later.
John was in advertising. He’d worked hard. Over time he had moved up in his company, and they had made him a partner. Not a big partner, but still a partner. That was the hard work part.
His firm had a good reputation, and when an advertising firm from London was looking for a St. Louis partner, they found John’s firm. They made John and John’s partners an offer they really couldn’t refuse. After taxes, John netted $5 million in the company shares. That was the lucky part.
Now for the religious part: he knew this was a gift. He knew that nothing just happens by chance, so the question was, what should he do with this gift? He couldn’t just give it away since he and his wife needed the income for retirement. He also had a pretty big tax liability he was facing, so he needed to do some planning.
He was working with a financial planner at the time. After talking this through, the planner recommended that John and his wife set up a charitable remainder unitrust, a CRUT. A CRUT allows a donor to make an irrevocable gift of a remainder interest while retaining the right to receive annual payments of a percentage of the value of the CRUT principal. Since there is an irrevocable gift involved, John and his wife were entitled to a charitable contribution deduction for a portion (though not all) of the value of the assets transferred to the CRUT. In addition, since the CRUT itself is tax exempt (unfortunately not the annual payments, though), they could at least to defer tax on the sale of his stock. Pretty nifty, eh?
When John was setting up the CRUT, he really hadn’t decided on what charities he wanted to benefit and how. I had warned him about just giving money outright to charities. I have seen congregations torn apart over money fights when they received a big gift. So we set up the CRUT, I included a provision so that he could designate the charitable beneficiaries in his will.
There a little trick to doing this. If you are making a gift to a public charity, for cash gifts, you can deduct up to 50% of your adjusted gross income (your “AGI”). If you’re giving real property, stocks, or bonds, then your deduction is limited to 30% of your AGI. However, if you are contributing to what is called a private foundation, then your deduction for cash gifts is limited to 30% of your AGI, and the deduction for non-cash gifts are limited to 20% of your AGI. There is a 5-year carry-forward for the unused charitable contribution deductions, so they’re not lost, but who wants to wait for a deduction.
If you reserve the right to name a charity in the future and say no more, then your deductions will be subject to the private foundation 30/20% limits. The trick is that the CRUT needs to provide that you can only designate qualified public charities as the beneficiaries of the CRUT. Then you contribution will be eligible for the 50/30% limits.
One last thing – John did not want to give up control. He didn’t want to be locked into a bank or a charitable foundation. He wanted to be his own trustee. So we named him and his wife as the initial co-trustees.
As you can see, CRUTs can be kind of complicated, but under the right circumstances, they are a tremendous way for charitably minded people to make a gift, get a deduction, defer taxes on capital gains, and earn tax deferred income like in an IRA.
To learn more or to analyze whether this is a good option for you, feel free to call and make an appointment. I look forward to hearing from you.
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