Gifts of tangible personal property—collectibles such as works of art, coin collections, and antique automobiles—are subject to special rules that often limit the deduction a donor may take. While the deductions for most gifts of long-term capital-gain property are based on the full fair-market value of the assets given, the deduction for a gift of collectibles must be based on its adjusted cost basis unless it can be put to a use that is related to the charity’s exempt purposes.
Because a charitable remainder trust (CRT) cannot put tangible personal property to a related use, the deduction for contributing such property to a CRT will always be based on the property’s cost basis, not its fair-market value. Furthermore, the charitable deduction—based on cost—is delayed until the CRT disposes of the collectibles. Conventional wisdom, therefore, holds that collectibles should not be used to fund a charitable remainder trust.
In some situations this conventional wisdom ignores a very important tax consideration related to collectibles. When collectibles are sold, the realized long-term capital gain is subject to tax at the rate of 28% rather than the 15% maximum that applies to long-term gain on most securities and real estate. If, however, appreciated collectibles are transferred to a CRT, the donor does not recognize any capital gain at the time of the transfer. This additional tax benefit may put CRTs funded with collectibles on par with those funded with cash, securities, or real estate.