In 2013, the tax rate on capital gains increased to 20%, plus a 3.8% Medicare surtax for affluent taxpayers. This substantial capital gains tax increase causes charitable remainder trusts to be more attractive.
Typically, the trust is funded with highly appreciated assets. The trust can sell these assets and avoid tax on any capital gain. The trust continues to hold 100 cents on the dollar to reinvest, while an individual selling those assets would be left with as little as 77 cents after tax (assuming zero tax basis in the donated assets). The trust can pay a lifetime income to income beneficiaries, including the donor(s), with the remainder of the trust assets going to charitable entities. The grantors of a charitable remainder trust get an upfront tax deduction for the present value of the future donation. The value of the net charitable deduction must be at least 10% of the value of the donated assets.
In summary, these trusts are useful to avoid capital gains taxes, and provide a charitable donation with the tax savings. Because the minimum charitable value is less than the taxes saved, a charitable contribution can occur with money that might otherwise be used (some might say wasted) for taxes.
These trusts are irrevocable, so the grantors need to be certain of their long-term desires. The corpus of the donated assets are no longer available to the grantors if an emergency or change in needs occurs. Additionally, the trusts can also be complex to establish and administer. Because of this complexity, they work best when larger amounts (say, a million dollars in gross assets) are involved. In some cases, the charitable beneficiary may be willing to act as the trustee and perform the needed administration.
This article provides a description of a private annuity, and the related tax ruling that upheld this arrangement.