Opportunities to Maximize Your Charitable Gift – Part 3

Marshall Rathmell |


As the holiday season approaches, many people begin to think about giving and helping others.  We typically get questions as to how to most effectively and advantageously give donations and charitable gifts.  Marshall has written a series of short stories that help describe how donors of all types and ages can maximize their benefits while benefiting others. 


A client nearing retirement had a significant amount of his net worth held in stock which had been granted to him throughout his career.  He wanted to liquidate the holding and diversify his investments, but he was uncomfortable with the tax bill he would receive for the sale as he had virtually no cost basis in the asset.

This situation was a great opportunity for him to create a Charitable Remainder Annuity Trust (also known as a CRAT).  A CRAT is a trust with both charitable and non-charitable beneficiaries. When the trust is created, the charity's interest in the trust assets is a "remainder interest," which means it is second in line to someone else's interest. For this reason, this trust is characterized as a remainder trust. A CRAT works like this:

  • You transfer property to a trust. It can be most anything (money, securities, real property, a statue).
  • You choose a qualified charity (a charity must be a "qualified" one in order for your contributions to be tax deductible).
  • You designate a non-charitable beneficiary. This person can be most anyone (you, your spouse, a friend).
  • You determine, within set guidelines, how much money the non-charitable beneficiary is to be paid each year out of the trust assets (called the annuity rate). IRS rules require this payment to be at least 5 percent, but no more than 50 percent, of the initial fair market value of the trust assets.
  • You determine how long the trust will last. It can be for the life of the non-charitable beneficiary (or joint lives for multiple beneficiaries) or for a fixed period of years up to 20 years.
  • At the end of the stated period of time, all the remaining trust assets pass to charity.

It is perfectly acceptable, even preferable, to set up a CRAT and fund it with an asset that has appreciated substantially in value (for example, stock, a closely held business, or real estate). When the trust sells the asset, it pays no capital gain or income taxes on the sale. The trust can then invest the proceeds and provide you or your designated beneficiary with an income stream off of a much larger principal than if you had sold the asset yourself and paid capital gain tax.  Not only would the client get a deduction currently for the expected benefit to the charity in the future, but the income calculation is done on the value of the asset without taxes.  In some situations a beneficiary can receive a larger after tax value with the combination of the deduction and payments that they would have otherwise.

-Marshall Rathmell-


Click here to see Part 2

Click here to see Part 1


*Some of the material above was prepared by Broadridge Investor Communication Solutions, Inc.

**Before deciding to create a CRAT or any other charitable strategies consult with a competent tax and/or legal professional to understand the effects on your specific situation