The stock market has been strong over the last few years, with the S&P 500 gaining about 200% from its bottom in March 2009 through the end of 2014.1 The housing market has also turned upward, and national home prices have bounced back to 2005 levels.2 In this improving economic environment, many people may have assets that have appreciated significantly in value since they were purchased.
That’s good news, but selling highly appreciated assets could generate a steep federal tax bill — as high as 23.8%, depending on your tax bracket (20% maximum long-term capital gains tax and 3.8% net investment tax). And state taxes could make the total liability higher. If you own such assets and also want to leave a legacy to a favorite charity, you might consider a charitable remainder trust (CRT).
Full Asset Value
When you transfer assets to a qualified charity using a CRT, the charity receives the full value of the assets without any tax liability. The charity can then invest the assets and make income payments to you or anyone else you choose.
The income payments must be made at least once a year and could last for a fixed term (not exceeding 20 years), for your lifetime, or for the lifetime of your surviving spouse or other designated beneficiary. Income payments might be fixed or variable, depending on the trust. The trust income is generally taxable.
At the end of the specified term — whether it’s a period of years or upon your death (or the death of your spouse or designated beneficiary) — the remaining assets in the trust go to the charity.
Along with the income stream from the trust, you may qualify for an income tax deduction in the year that you place the assets in the trust, based on the estimated present value of the remainder interest that will eventually go to the charity.
While a CRT could be a win-win situation for you and your favorite charity, keep in mind that all trusts incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.
1) Yahoo! Finance, 2015, S&P 500 for the period 3/9/2009 to 12/31/2014. The S&P 500 is an unmanaged group of securities considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
2) S&P/Case-Shiller U.S. National Home Price Index, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.