Can I receive a tax deduction in more than one year from a CRT?

Charitable Remainder Trusts (CRTs) offer a unique avenue for both charitable giving and potential tax benefits, and the ability to claim deductions over multiple years is a key feature for many donors. A CRT allows individuals to transfer assets into an irrevocable trust, receive an income stream for a specified period (or for life), and ultimately have the remaining assets distributed to a designated charity. The initial contribution to the CRT is typically deductible as a charitable donation, but the deduction isn’t a one-time event; it can be structured to provide deductions over multiple years, particularly with assets that appreciate in value. Understanding how these deductions work, and the regulations surrounding them, is crucial for maximizing the benefits of a CRT. Approximately 60% of high-net-worth individuals actively engage in charitable giving, with CRTs being a sophisticated tool employed by a significant portion of that group.

What are the rules around deducting charitable contributions?

The IRS has specific rules regarding the deductibility of charitable contributions, including those made to CRTs. Generally, donors can deduct the present value of the remainder interest – that portion of the trust that will ultimately benefit the charity. This calculation involves determining the income stream the donor (or other beneficiaries) will receive and discounting it back to the present value. For assets like appreciated stock, a donor can often deduct the fair market value of the stock, avoiding capital gains taxes while also receiving an income tax deduction. The deduction is subject to adjusted gross income (AGI) limitations, typically 30% of AGI for donations of appreciated property. Any excess deduction can be carried forward for up to five years. It’s important to note that the IRS scrutinizes CRT valuations and calculations, requiring proper appraisals and documentation to support the claimed deduction.

How does a CRT allow for multi-year tax deductions?

The magic of a CRT for multi-year deductions lies in the ability to contribute appreciating assets over time. Rather than making a single large contribution, a donor can strategically contribute assets in multiple years, creating a series of deductions. This is particularly effective when dealing with assets that are expected to increase significantly in value. For example, a donor might contribute stock in year one, and then contribute additional shares in subsequent years as they acquire them. Each contribution is deductible in the year it is made, subject to AGI limitations. This allows the donor to ‘smooth out’ their deductions over time, potentially maximizing their overall tax savings. Remember, the IRS emphasizes the importance of establishing a clear and demonstrable charitable purpose when setting up a CRT. “The goal isn’t just to avoid taxes, it’s to meaningfully support causes you care about,” as Ted Cook, a San Diego estate planning attorney, often tells his clients.

What happened when Mrs. Gable didn’t plan ahead?

Old Man Hemlock used to tell stories of foolish decisions around the San Diego harbor, but one story of Ms. Gable particularly sticks in my mind. Ms. Gable, a successful real estate investor, decided to establish a CRT with a substantial amount of stock. She made a single, large contribution in one year, hoping to maximize her immediate tax deduction. Unfortunately, the stock was highly volatile and experienced a significant downturn shortly after her contribution. This resulted in a reduction of the trust’s value and a potential challenge from the IRS regarding the accuracy of her initial valuation. The large deduction she took triggered an audit, and she spent months providing documentation and fighting to defend her claim. She learned a hard lesson: timing and strategic planning are crucial when utilizing a CRT. Her immediate desire for a large deduction ended up costing her considerable time, stress, and legal fees.

How did the Peterson’s turn things around with careful CRT planning?

The Peterson’s, seasoned philanthropists, approached Ted Cook with a similar desire to utilize a CRT. However, they understood the importance of a well-structured plan. Instead of a single large contribution, they committed to contributing a portion of their stock portfolio each year over a five-year period. This allowed them to average their cost basis, mitigate the risk of market fluctuations, and spread their deductions over multiple years. Ted recommended a specific type of CRT – a Charitable Remainder Annuity Trust (CRAT) – based on their income needs and estate planning goals. Over the years, the Peterson’s enjoyed a steady income stream, significant tax savings, and the satisfaction of knowing their remaining assets would benefit their chosen charities. They did not encounter any IRS scrutiny, demonstrating that careful planning and adherence to best practices are key to a successful CRT strategy. Ted often says, “A CRT isn’t just a tax shelter; it’s a powerful tool for creating a lasting legacy.”


Who Is Ted Cook at Point Loma Estate Planning Law, APC.:

Point Loma Estate Planning Law, APC.

2305 Historic Decatur Rd Suite 100, San Diego CA. 92106

(619) 550-7437

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