Centara Connection

The Benefits of a Charitable Remainder Trust

Alan Clopine, CPA, Director of Tax Consulting

Each week the financial planners at Centara meet with individuals who are planning their retirement. Some have already retired, while others are within a few years of retirement. In most cases, their goals include improving income, reducing taxes and creating a tax efficient plan to transfer assets to beneficiaries.

One technique that often is explored is the popular and time-tested Charitable Remainder Trust. This is truly a technique that can increase income, reduce income taxes and reduce future estate taxes. A taxpayer contributes an appreciated asset (real estate, stocks, etc.) to a Charitable Remainder Trust. The trust sells the property and pays no income taxes on the gain. The taxpayer receives an income stream for the remainder of their life. The taxpayer designates the charities to receive the remainder asset at his or her passing.

Let’s review the benefits to the taxpayer. Because there is no income tax to pay on the gain upon sale, the taxpayer receives a higher lifetime income stream with a larger principal balance. Since a charity will receive the asset in the future, the taxpayer receives a current tax deduction. Because the asset is no longer part of the taxpayer’s taxable estate, there will be no estate taxes to be paid on that asset.

We have seen many examples where taxpayers have quadrupled their income on an asset, while receiving a significant tax deduction.

Let’s say a 70 year-old taxpayer has a free and clear rental property worth $1 million, purchased thirty years ago at a cost of $100,000. If the property is located in San Diego, the annual cash profits are likely no more than $20,000 or 2% of the equity. If the property were sold outright, the taxes on the sale would be approximately $250,000. Accordingly, net cash proceeds would be $750,000 (net of taxes) to create an investment portfolio. Assuming an 8% return on the assets, the annual income would be $60,000.

If that same asset were contributed to a Charitable Remainder Trust, the entire $1 million would be available to create an investment portfolio for the taxpayer. Assuming an 8% return on the assets, the annual income would be $80,000. A tax deduction of approximately $200,000 would be allowable on the taxpayer’s income tax return. At a 40% tax rate, the taxpayer would receive a windfall from the government of $80,000. Finally, since there is no estate tax on that asset, there is a potential tax savings of over $400,000 for the estate.

Many taxpayers are excited at this point but have one major reservation. Am I short-changing my kids because they will not receive the asset on my passing? This situation is easily resolved by purchasing life insurance for $1 million. The cost of the insurance is in most cases significantly lower than the income and tax reduction benefits. It’s no wonder that the Charitable Remainder Trust is a popular planning tool.

If you would like to find out more about the Charitable Reminder Trust or other planning tools, please contact the professionals at Centara Capital Management Group.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member NASD/SIPC. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. Insurance #0D85861. CA DRE License No. 01519824. Legal services provided by Centara Legal Group, APC, David Gebhardt, Principal.