The Investment Scientist

Save Taxes with Charitable Remainder Trust: A Real Life Example

Posted on: July 31, 2018

adhesionactif.jpgAfter my last article, “How to Deal with ConcentratedHighly Appreciated Position,”a reader asked me exactly how much he can save in taxes.

I’ll use  him as an example. He owns an investment property that he bought many years ago for $200k that is now worth $800k.

If he sells his investment property outright, he will need to pay a capital gain tax of the amount (800-200)*20% = $120k.

He can set up a CRT (charitable remainder trust), put the property in it , so when he sells it, the capital gain tax is exempt. That’s a savings of $120k right there.

But does he need to give all of that to charities? The answer is no. In fact he can take out money from the trust for his personal use.

Depending on how he takes out money, a CRT can be either a CRAT (charitable remainder annuity trust) or a CRUT (charitable remainder unit trust.)

The bottom line is he can take out between 5% to 50% of the initial contribution value every year in a CRAT or he can take out between 5% to 50% of the remainder value in a CRUT every year.

At this point, my reader might have a brilliant idea: what if I put the property in the CRT, sell it and then take the money out in two years (50% each year) and just leave $1 for charities?

The IRS is not stupid. They put in other requirements to make sure that doesn’t happen:

  • Actuarially, 10% of the contribution value should go to charities.
  • Actuarially, the odds of the trust value going to zero must be less than 5%.

In other words, of the $800k, at the minimum $80k must go to charities. The rest you can take out for your personal use. The $80k that goes to charities is tax deductible right away. For a person in the top combined marginal tax rate of 50%, the income tax savings is another $40k.

In summary, he gives $80k to charities he cares about, but saves $160k in taxes. Money wise, he is $80k ahead.

(Feel free to share if you find it insightful.)

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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