• Use a Charitable Remainder Trust to Minimize Tax

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    Kathleen Fowler, Esq.
    The Law Offices of Kathleen Fowler, LLC, with offices in Dennis on Cape Cod, and in Wellesley, Massachusetts, and a satellite office in Venice, Florida, provide sound legal advice, caring support and dedicated representation in a broad range of legal matters that are important to protecting the interests of individuals, families and businesses now and in the future.
    Kathleen Fowler, Esq.

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    By Kathleen Fowler and Bryan Kessler

    Using a Charitable Remainder Trust (CRT) to accomplish your charitable objectives now has another significant benefit.  Beginning in 2013, a married couple that files a joint income tax return and has adjusted gross income (AGI) exceeding $250,000 may face an additional 3.8% Net Investment Income Tax (NIIT) on any Net Investment Income (NII) earned during the taxable year.  People faced with this additional tax liability are seeking ways to avoid it.

    This article reveals a technique that allows people faced with this additional tax and who also have charitable objectives to avoid the NIIT while fulfilling their charitable purpose.  The technique involves creating a Charitable Remainder Trust (CRT) and funding it with investments that produce NII.

    NII includes, but is not limited to, income that is categorized as interest, dividends, annuities, royalties, rents, and gains from the sale of property that are not derived in the ordinary course of a trade or business.

    The NIIT is imposed on the lesser of a person’s NII and the excess of the person’s AGI over the threshold amount, which is $250,000 for a married couple filing a joint return.  For example, a married couple with an AGI of $275,000 who files a joint return and has $50,000 of NII will pay an additional 3.8% tax on $25,000 (the lesser of the couples NII ($50,000) and the excess of the couple’s AGI ($275,000) over the threshold amount ($250,000)), which is an extra $950.00 of tax over the tax bracket tax liability of $17,143.00.

    To avoid the NIIT, a person can create a CRT and contribute to it NII producing assets.  A CRT is an irrevocable trust that can be either a Charitable Remainder Annuity Trust or a Charitable Remainder Unitrust.  The only difference between the two types of CRTs is the manner in which the income stream payable to the grantor is calculated.

    The grantor of the CRT receives a current year income tax deduction and an annual income stream.  At the end of the CRT term (whether a term of years or the lifetime of a grantor, for example) the CRT assets ultimately go to one or more charities designated by the grantor.  In addition, the grantor acts as Trustee of the CRT and can also name additional beneficiaries to share in receiving the annual income stream (as long as that addition does not disqualify the CRT).

    Since a CRT is considered a charitable entity, any income it receives is exempt from both the income tax and the NIIT.  When an asset contributed to the CRT is subsequently sold, there is no income tax on the gain and no NII.  In addition, there is no estate tax on the value of the CRT when the grantor dies (as long as there are no subsequent beneficiaries) since the value is excluded from that person’s estate.

    If you have assets that produce, or can produce, a significant amount of NII and you are worried about the additional NIIT or a large capital gain tax if you sell, you should consider contributing those assets to a CRT to avoid significant income tax consequences while fulfilling your charitable purpose.

    March 22, 2014