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Trusts
Using CRTs to Build Family Wealth
By Henry V. Kaelber
President, Chief Investment Officer, Hoffman, White & Kaelber Financial Services, LLC
If I could show some of you a way to save significantly on taxes and build tremendous wealth in your family, would that be of interest to you? If I could also show some of you how to maximize your retirement savings, would you want to know about it? If I could explain a way for you to teach your children how to become, through leading by example, well respected citizens in their community’s, would that be something you’d want to strive for?
In this article, we’ll discuss some of the benefits of CRT’s; and, we’ll use an example that reflects how some of you may maximize your retirement savings and pass much more than financial wealth, tax free, to your heirs.
What Are Some of the Benefits?
Philanthropic.
Understanding how to use a CRT in the financial planning process can allow people to create something that lives on long after they are gone. Many people would like to make a charitable gift for various reasons but are not in a financial position to do so or simply do not know how. For a person who has charitable intent, the CRT provides the opportunity to express this desire.
Tax advantages.
Since a CRT is a tax-exempt vehicle, it can sell highly appreciated property without being taxed on the capital gain or ordinary income. Also, just like any other charitable contribution, the CRT gives the donor a current income tax deduction in the amount of the present value of the remainder interest and any of that deduction that is not used in the current year can be carried forward to future years. As an estate planning tool, assets placed in a CRT are not included in the estate of the donor, nor subject to gift taxes. Since the assets would be outside of the estate, this could cause the overall estate to be smaller, which could create compounded tax savings.
Investment advantages.
From the perspective of managing one’s investments, an individual may own highly appreciated assets in the form of real estate or a closely held business. Often an investor may be reluctant to sell some of their investments in order to diversify or to generate more income because they do not want to recognize a capital gain. If you knew that the value of your assets would drop 20% or more the moment you sold, wouldn’t you think twice about selling? Historically, it has been shown that a lack of diversification increases the risk of a portfolio more than the character of the actual investments. Using a CRT allows one to reposition the portfolio without loss due to taxes.
Of course, if taxes and portfolio diversification were the only objectives, a person could employ other strategies that would not involve surrendering ownership of the assets to a charity. However, the CRT makes good sense for the individual who wants to make a charitable gift and has appreciated assets.
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