In the early 1990s, when the capital-gain tax rate on securities and non-depreciated real estate was 28 percent and the maximum tax rate on ordinary income was 39.6 percent, the charitable remainder trust was very popular. If someone sold a highly appreciated asset, he or she would have only 72 percent of the gain to reinvest; but by transferring it to a charitable remainder trust, 100 percent of the proceeds could be reinvested.
Moreover, the donor received a significant income-tax deduction—and if in the highest bracket, every dollar of deduction resulted in nearly 40 cents of tax savings, with even more savings in a state that allowed a charitable deduction on the state return.
A decline in popularity
Later in the 1990s the capital-gain tax rate was reduced to 20 percent. Then under the Bush administration it was reduced still further to 15 percent, and the maximum federal tax rate on ordinary income decreased to 35 percent. During the first decade of the new century, we also saw two stock market declines and the collapse of real estate prices. Not surprisingly, fewer people established charitable remainder trusts; they had less to give, and their tax savings would be smaller.
Reasons for the revival
Now all of those factors that worked against charitable remainder trusts have been reversed. The Dow is at an all-time high, home prices are rising again, and income-tax rates are back to where they were in the 1990s. The capital-gain tax rate on securities and non-depreciated real estate can reach 23.8 percent—including the new health-care surtax—and the top income-tax rate is once again 39.6 percent. Little wonder that we are seeing a revival of charitable remainder trusts.
Benefits to the family
Aside from offering a way to convert highly appreciated assets to life income without current taxation of the gain while reducing taxes on other income, a charitable remainder trust can be the solution for a variety of family situations:
- It can increase income during retirement.
- It can permit the diversification of a concentrated stock position without incurring capital-gain tax.
- It can be a means to accumulate more for future retirement on a tax-sheltered basis.
- It can be a tax-favored way to provide for heirs with remaining retirement funds.
- It can be a means to provide for a relative who is not a prudent money manager.
And, yes, you can choose the charitable purpose for the remaining trust assets. For example, you could create a fund in your name or your family’s name. Please contact us for more information.