A woman died and was taken to heaven.  At first, the angel escorting her stopped and showed her hell.  Hell had a lake of nutritious stew, but the people there only had 12-foot spoons and were unable to feed themselves, despite endless attempts at using the spoons.  The people were miserable and hungry.  Then the woman was taken to heaven.  Amazingly, heaven was exactly the same, with a lake of nutritious stew and 12-foot spoons.  The people were happy and well-fed.  The woman asked, "Why are these people so different?"  The angel replied, "They feed each other; these people have learned the way of love."  (Adapted from Benjamin Franklin)

CHARITY BEGINS AT HOME

Charity is just a simple act of giving to those in need.  A common perception and somewhat of an impediment to charity is the perception that one must deprive themselves of something in order to be charitable. However, this is not necessarily the case.  In the context of the sale of an appreciated asset, such as a business, it is possible to both profit personally and feed a healthy spoonful of good to a charity by way of a Charitable Remainder Trust.  

FEEDING YOUR FAVORITE CHARITY WITH A 12-FOOT SPOON

A Charitable Remainder Trust ("CRT") is an irrevocable trust that pays an annuity or income interest to a person (usually the donor) for life or a term of up to twenty (20) years.  At the end of the term, the remainder of the trust passes to one or more designated charities.  

A key feature of a CRT is that it is generally exempt from all taxes, which allows it to sell donated assets without recognizing any gain or loss, subject to a few exceptions. This unique feature allows a donor to (i) dispose of highly appreciated assets (including business assets) without immediately recognizing capital gain, (ii) enjoy a charitable income tax deduction, and (iii) receive an income stream which may be enhanced by the tax free appreciation of sale proceeds inside the CRT.  

An example of an asset sale through a CRT may look something like this: 

1. An individual establishes a CRT and contributes $1M of low basis publicly traded stock.
2. The individual receives a charitable income tax deduction equal to the value of the remainder interest eventually passing to charity.  
3. The CRT thereafter sells the stock without recognizing any gain. 
4. The CRT pays an annuity or unitrust amount to a designated individual (typically the donor) for life or a term of years. 

In a low interest rate environment, the donor will generally receive a larger income tax deduction with a unitrust instead of an annuity.  A unitrust is a fixed percentage of the fair market value of the assets donated to the CRT revalued each year.  An annuity is a fixed percentage of the donated assets determined once upon formation of the CRT.  

GETTING FED WITH A 12-FOOT SPOON 

The point at which the benefits received by the donor of sale through a CRT exceeds the remainder interest ultimately passing to charity is commonly referred to as the "crossover point."  Life insurance can be used to make up any difference. Sophisticated software is available to project the crossover point and to calculate the long term benefits of a CRT.  For this reason a CRT can be a win-win for both the donor and the charity.   

DON'T FEED A HOG WITH A 12-FOOT SPOON

Proceed with caution if a sale is imminent.  When the right to income from a sale has "ripened" for tax purposes, i.e., the deal is absolutely locked, then the donor must recognize the income from the sale even if the donation to the CRT occurs before the sale is consummated.  For example, a certain publicly traded corporation appears to be set to go "private" in the foreseeable future.  If a shareholder donates stock of the corporation to a CRT after the deal is locked (i.e., all necessary shareholder and director approvals have been obtained and an agreement is in place), the IRS may invoke the anticipatory assignment of income doctrine.  This is very much a facts and circumstances test and there is room for debate over the precise point at which the sale has ripened, but proceed with caution and consult with competent counsel to minimize risk.  

 CONCLUSION
 

Contemplating the sale of a highly appreciated asset (whether a business, improved real estate, timberland, investments, art, etc.) is generally a good problem.  When the time comes, it is always worthwhile to "run the numbers" through a charitable trust.  Under the right circumstances and with proper planning, one can reap the full benefits of the unripened sale, while "feeding" the charities that fuel the greater good.