Charitable Remainder Trusts (CRTs) are powerful estate planning tools, allowing individuals to donate assets to charity while retaining an income stream. While often visualized as cash distributions, CRTs offer flexibility beyond simple monetary payments. A CRT *can* indeed make payments in kind – meaning distributions of assets other than cash – but this comes with complexities. The IRS permits this as long as the non-cash assets meet specific criteria, primarily concerning liquidity and fair market value determination. Approximately 25% of CRTs utilize some form of non-cash distribution, largely due to the desire to avoid capital gains taxes on appreciated assets. Understanding the nuances of ‘in-kind’ distributions is crucial for both the grantor establishing the trust and the charitable beneficiary receiving the assets, and a San Diego estate planning attorney specializing in trusts can navigate these complexities.
What are the tax implications of non-cash CRT distributions?
The tax implications of distributing assets other than cash from a CRT are significant. Generally, the income received from a CRT is taxable to the beneficiary, but the character of the income (ordinary or capital gain) carries over from the trust itself. When a CRT distributes appreciated property, the beneficiary generally takes a carryover basis and must recognize gain to the extent of the fair market value of the property received, less their basis. This can lead to unexpected tax liabilities for the beneficiary. For instance, if a CRT distributes stock originally purchased for $10,000 now valued at $50,000, the beneficiary will likely recognize a capital gain of $40,000. Proper planning with a qualified tax advisor and a seasoned estate planning attorney is essential to minimize these tax consequences, potentially through strategies like diversifying trust assets or strategically timing distributions.
How do you determine the fair market value of non-cash assets?
Determining the fair market value (FMV) of non-cash assets distributed from a CRT is critical. For publicly traded securities, FMV is generally straightforward – it’s the closing price on the date of distribution. However, for less liquid assets like real estate, artwork, or private company stock, establishing FMV becomes more challenging. A qualified appraisal from a reputable appraiser is often required, adhering to IRS guidelines (specifically, IRS Revenue Procedure 2009-46). The IRS scrutinizes appraisals closely, and a flawed appraisal can lead to penalties and interest. We once had a client, old Mr. Abernathy, who insisted on donating a vintage car to his CRT without a proper appraisal. The IRS challenged the claimed value, triggering a costly audit and delaying the charitable deduction. It’s crucial to remember that the IRS will often rely on its own independent valuation if it disputes the appraisal.
What happens if a charity can’t use a non-cash asset?
A significant hurdle with in-kind CRT distributions is ensuring the charitable beneficiary can actually *use* the asset. A charity’s acceptance of a non-cash donation is contingent on its ability to utilize it effectively. For example, a museum might gladly accept a valuable painting, but a food bank would be unable to accept it. If a charity can’t use the asset, it may be forced to sell it. While this isn’t inherently problematic, it can create logistical challenges and potentially reduce the overall charitable impact. I recall Mrs. Davison, a wonderful philanthropist who gifted shares of a small, highly specialized tech company to her CRT. The designated charity, a local hospital, was unable to sell the shares due to restrictions imposed by the company. The ensuing legal battle to lift those restrictions delayed the charitable benefit for over a year and created considerable frustration. Careful coordination between the grantor, the trustee, and the charity is paramount to avoid such scenarios.
Can careful planning prevent issues with in-kind CRT distributions?
Absolutely. While in-kind distributions introduce complexities, careful planning can mitigate many of the risks. The key is proactive communication and a thorough understanding of all relevant tax rules and regulations. Before establishing a CRT, discuss the possibility of non-cash distributions with both your estate planning attorney and a qualified tax advisor. Ensure the designated charity is willing and able to accept the proposed assets. Consider diversifying the trust’s holdings to include more liquid assets. And, most importantly, obtain qualified appraisals for any non-cash assets to establish a defensible fair market value. We recently worked with the Hemmings family, who wanted to donate several parcels of undeveloped land to their CRT. They proactively engaged us to conduct due diligence on the land, obtain environmental assessments, and secure appraisals. The charitable organization, a local land trust, was thrilled with the donation, and the entire process was seamless. By anticipating potential challenges and addressing them proactively, the Hemmings family ensured their charitable goals were achieved efficiently and effectively.
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About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
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