An Immediate Charitable Tax Deduction:
In addition to escaping the capital gains tax, as
donor of property to a CRT, you will receive an
immediate charitable tax deduction for your donated
property in the year in which the transfer is made.
The amount of the total tax deduction allowed is
that of the present fair market value of the projected
remainder interest. This calculation is based on
several variables: IRS life expectancy tables and the
age of the indicated beneficiary (or the term of years
for which the CRT is created); the current assumed IRS
midterm discount interest rate; the fair market value
of the property itself; the percentage or fixed payout
rate you choose for your life income payments from the
CRT.
For example, take that $1 million building as a
CRT gift. Using a life expectancy of twenty years, a
1992 IRS midterm discount rate, and a 10 percent payout
rate (easy for purpose of arithmetic, but unlikely in
today's low interest rate environment), you would have
a $135,203 income tax deduction to be applied against a
maximum of 30 percent of your adjusted gross income for
the year. If the deduction causes you to exceed the 30
percent ceiling on total deductions, you can carry over
the excess for up to five succeeding years.
In an instance where the property donated to the
CRT is only slightly increased in value (it must be
held for at least one year in order to qualify as a
long-term capital gain), the donor can elect to base
his or her tax deduction on the actual cost basis, in
which case they are allowed total deductions of up to
50 percent of their adjusted gross income. If the
asset has been held for more than one year, its full
appreciated value must be used as the basis for
calculating the available tax deduction limited to 30
percent.
In some cases, as when two spouses are to be the
beneficiaries, establishing two CRTs and splitting the
gift, making each spouse a sole beneficiary, can
greatly increase the income tax deduction. If the CRT
declaration terms permit, as they should, additional
contributions can be made to the trust at any time, and
the income tax deductions allowed for that year will be
based on the current age of the beneficiary.
Note that because of a change in federal tax law,
any charitable gifts made after January 1, 1993 are not
subject to the so-called "alternative minimum income
tax." Prior to that date, the untaxed appreciation in
the value of the property included in the charitable
deduction was treated as preference income and subject
to the alternative minimum income tax.
As a general rule, property transferred to a CRT
will be completely free of any federal gift taxes or
estate taxes for the donor, so long as the donor and
his or her spouse are the sole beneficiaries.
