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Contributing
shares to a Charitable Remainder Trust (CRT) allows a shareholder with a large
concentrated stock position to sell stock
without paying a current capital gains tax. As a result, any
risk associated with continuing to hold the stock is eliminated and
the tax on the gain is deferred or eliminated.
A
concentrated shareholder generally sets
up a CRT with the assistance of a lawyer and contributes to it the stock to be sold. The
trustee of the CRT can then sell the stock and reinvest 100% of the
sale proceeds in order to put together a diversified investment
portfolio.
The
CRT then makes payments at least annually to one or more
non-charitable beneficiaries for life or for a specified term of up
to 20 years. The assets in the trust pass to one or more charitable
organizations when the payments terminate.
There
are two types of a CRT: a charitable remainder annuity trust (CRAT)
and a charitable remainder unitrust (CRUT). In
a CRAT, the annual payment is a fixed dollar amount that remains
constant throughout the term of the trust. In a CRUT, the
annual payment is a fixed percentage of the value of the trust as
revalued each year. In the latter, the investment performance
of the assets in the trust directly affects the annual amount
distributed to the non-charitable beneficiaries.
The
shareholder who creates the CRT chooses the type of trust, the trust
beneficiaries, and the trustee, and specifies the amount of the
annual payment (in the case of a CRAT) or the percentage of value to
be distributed (in the case of a CRUT). The shareholder can be
the trustee, generally without any adverse income consequences.
The
shareholder is entitled to a current income tax deduction for the
present value of the charitable remainder interest when the trust is
created. As long as the shareholder, or the shareholder and
the shareholder’s spouse, are the only non-charitable beneficiaries
of the CRT, the creation of the trust will not have any gift tax
consequences.
In
most cases, the CRT is totally exempt from income tax.
Distributions are taxable to the recipient under a tier system.
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