Charitable Remainder Trusts (CRTs) are powerful estate planning tools that allow individuals to donate assets to charity while retaining an income stream, but the question of whether those assets qualify for a step-up in basis upon the grantor’s death is complex and often misunderstood. Generally, assets held within a CRT do *not* receive a step-up in basis at the grantor’s death, as the assets are technically owned by the trust, not the individual; however, there are nuances and planning strategies that can mitigate this. The IRS generally assesses the value of the charitable deduction taken when the trust is created, and subsequent appreciation is not eligible for a step-up. As of 2023, approximately $67.9 billion was held in CRT assets, showcasing their popularity, yet many clients remain unaware of the basis implications.
What happens to assets in a CRT when the grantor dies?
When the grantor of a CRT passes away, the trust’s assets don’t go through probate, offering a significant benefit. Instead, the assets remain within the trust and are distributed according to the trust’s terms to the designated charitable beneficiary. The remaining assets are then used to fulfill the charitable purpose outlined in the trust document. While this avoids probate, it’s crucial to understand the tax implications; the assets are valued at their fair market value at the time the trust was funded, not at the time of death. This can be particularly disadvantageous if the assets have significantly appreciated since the trust’s creation. A little-known fact is that approximately 30% of CRT assets are held in highly appreciated stock, amplifying the potential loss of step-up basis benefit.
How does this differ from inheriting assets directly?
When an individual inherits assets directly, such as stocks or real estate, those assets receive a “step-up” in basis to their fair market value on the date of the decedent’s death. This means that any appreciation that occurred *before* death is not subject to capital gains tax when the assets are later sold. However, this benefit is *not* automatically extended to assets held within a CRT. The IRS views the assets as having been removed from the grantor’s estate when the trust was established. I recall a client, Eleanor, a retired teacher, who funded a CRT with shares of a tech company she’d held for decades. She assumed her heirs would receive a step-up in basis, only to be shocked when they faced a substantial tax bill upon selling the shares after her passing. This highlights the importance of understanding the rules before establishing a CRT.
Are there strategies to maximize benefits despite the lack of step-up?
While a direct step-up in basis isn’t usually available, careful planning can minimize the impact of this limitation. One strategy is to fund the CRT with assets that have a low cost basis or assets that are expected to depreciate. Another approach is to include a “grantor retained annuity trust” (GRAT) component within the CRT structure, allowing the grantor to receive an annuity payment and potentially transfer assets out of the estate tax-free. I had another client, Robert, a successful entrepreneur, who was concerned about this issue. We strategically funded his CRT with a diversified portfolio, prioritizing assets with lower inherent gains. When his children eventually sold the assets after his passing, the tax burden was significantly lower than if he hadn’t implemented this tailored approach. Proper planning is key, and it’s always best to consult with an experienced estate planning attorney.
What can happen if you don’t plan appropriately?
Consider the story of Mr. Henderson. He established a CRT with highly appreciated real estate, believing he was securing a charitable deduction and providing for a worthy cause. Unfortunately, he didn’t fully grasp the implications regarding the step-up in basis. When he passed away, his heirs were faced with a hefty capital gains tax bill when they eventually sold the property, eroding a significant portion of the inheritance. They felt blindsided and frustrated, wishing they had known about the potential tax consequences beforehand. It was a painful lesson learned, highlighting the critical importance of seeking professional guidance. Conversely, Mrs. Davies, a client who proactively worked with our firm, had a similar situation but a vastly different outcome. We advised her to diversify her CRT assets, including some low-basis assets and exploring other estate planning tools. As a result, her heirs were able to minimize the tax burden and maximize the benefit of her charitable giving. This demonstrates that with careful planning and expert advice, it’s possible to navigate these complex issues successfully.
“Proper estate planning isn’t about avoiding taxes; it’s about minimizing them legally while ensuring your wishes are carried out and your loved ones are protected.”
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
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Feel free to ask Attorney Steve Bliss about: “How do I store my estate planning documents safely?” Or “Can I challenge a will during probate?” or “What if a beneficiary dies before I do—what happens to their share? and even: “What are the different types of bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.