A Stillwater resident since 1979, Tom Dugger is a certified public accountant and current Oklahoma State Senator. When he decided it was time to sell rental property he owned in Stillwater, he and his attorney drafted a charitable remainder trust and brought it to the Oklahoma City Community Foundation.
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Now, Tom and his wife, Ann, receive quarterly distributions from the trust for their lifetimes, after which the remainder of the trust will benefit the charitable interests of their choice.
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Is 2019 the Time to Create a Charitable Remainder Trust?
by Joe Carter, Oklahoma City Community Foundation Vice President of Development
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Since first being introduced as part of the IRS Code in 1969, the popularity of charitable remainder trusts (CRTs) depends on the rise and fall of long-term capital gains tax rates. The higher the tax rates, the more common CRTs are for those seeking to reduce capital gains exposure. The Bush-era tax cuts in 2001 sent CRTs on a steady decline, but with the stock market experiencing all-time highs, now may be a great time to revisit the CRT strategy. CRTs may be particularly attractive for the highest wage earners whose total federal tax liabilities reach 23.8% when coupled with the Medicare surtax on capital gains.
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Advisors should consider suggesting a CRT whenever a client:
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- Desires annual cash flow
- Has highly appreciated assets
- Is interested in charitable giving
- Is in a high tax bracket
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Advisors will not only help create a financial benefit for their client, but will also facilitate an eventual gift to a good cause. Of course, advisors and their clients should always work with a qualified attorney to ensure legal and tax requirements are met. As always,
contact me
at 405/606-2014 if you have questions. I’m happy to help.
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A 60-year-old client owns 10% interest in a company that is in the process of negotiating a sale. The anticipated sales price is around $15 million. He has a low cost basis in the stock. For illustration purposes, we’ll assume his combined federal and state ordinary tax rate is 45% and his combined capital gain rate is 25%.
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If he sells all of his stock for $1.5 million, his tax bill will be $375,000. He will have $1,125,000 remaining, which will be available for investment. If he were to withdraw 5% per year, his annual pretax cash flow from the investment will be about $56,250.
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Alternatively, he could gift 50% of his stock into a CRT, paying out at 5% per year. The appraised value at time of contribution is $700,000. He will get a charitable deduction of approximately $267,000, which will reduce his tax bill by about $120,000. He will also pay capital gains tax of $187,500 on the remaining $750,000 sold.
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Thus, his personal investment pool will be $682,500 ($750,000 sales proceeds less $187,500 capital gains tax plus $120,000 tax savings). Assuming the trust can earn a 5% annual return, his annual cash flow at 5% will be $34,125 from his investments plus $37,500 from his CRT, or a total of $71,625. This is $15,375 more per year than if he simply sold all of his stock.
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Are you an
estate planning professional
looking to increase your knowledge to better serve your clients? Check out this free luncheon hosted through the Oklahoma City Community Foundation and the Cannon Financial Institute!
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August 27
Practical Solutions to Vexing Trust Administration Dilemmas
Registration closed.
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September 24
Contemporary Uses for Life Insurance In Estate Planning
Registration opens August 27.
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October 22
Unmaking Messes
Registration opens September 24.
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Registration for each event will open
online
following the prior month's teleconference.
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For additional resources please visit our
website.
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