Walt Mozdzer, CFP®, CAP®, CEPA®
Children Gardening

Waaaaay back in 2003, the most money an individual could pass to their heirs without the burden of federal estate taxes was a measly $1 million. Today, the limit is $11.18 million. A married couple can pass just over $22 million free of Federal Estate Tax. Less than one in 10,000 estates will need to worry about paying estate taxes today. Only the truly wealthy need to worry about planning around the tax burden that awaits them, right? Perhaps. However, one of the tools favored by the affluent in order to avoid estate tax is still around and could be finding new momentum: the Charitable Remainder Trust.

In the world of philanthropy, the Charitable Remainder Trust has been around for decades. Often little-understood but known for its prowess in avoiding estate and transfer tax, it comes in handy as a tool for avoiding capital gains tax, as well. As the levels of affluence in the U.S. continue to rise, some of that wealth can be found in concentrated holdings such as business interests, real estate, stock, and mutual fund positions, and, in Iowa, even in farmland and grain.

Consider Stan, who has $1 million of Apple stock. Stan’s cost basis is $100,000, which means he has enjoyed a steep $900,000 of gain in his Apple investment. Stan is thrilled he made such a smart investment. But when his financial advisor directs him to sell the Apple stock and reinvest the cash in a diversified portfolio, Stan’s smile turns to a frown as he calculates his capital gains tax of at least 15%, net investment income tax of 3.8% and Iowa income tax that tops out at nearly 9%. Stan becomes despondent over what should be a reason to celebrate—the investment gains he has garnered.

Fortunately, his financial advisor was familiar with the Charitable Remainder Trust (CRT) and offered to help him transfer a portion ($400,000) of his Apple stock into this tax-exempt trust. Did you catch that? Yeah, it’s tax-exempt, which means Stan can sell the Apple stock and avoid an “invest what’s left after taxes” scenario. Stan converts the entire $400,000 cash and then reinvests into a proper mix of investments, spanning markets across the globe. He and his wife, Alice, elect to receive 5% of the trust investment value, or $20,000 per year, adjusted annually for changes in the trust value. Alice remarked that the 5% they are getting is certainly better than the 1.35% dividend they were getting when they held the stock directly.

Since Stan and Alice will receive a $156,140 tax deduction (39% of the transferred amount), the tax savings will help offset the capital gains tax on the remaining shares of Apple he will sell, himself. As far as the tax they will owe on the income they will receive each year from the trust, most of it will be long-term capital gains, due to the original appreciation of the Apple shares. Annual investment income is taxed each year, as well, under the trust’s “multi-tier” system of taxation. Still, the capital gains is taxed as income received, sometimes at a lower rate, and the full $400,000 was available right away to produce income, not a reduced “after-tax” amount.

If something were to happen to either Stan or Alice prematurely, the trust income would continue to pay the surviving spouse as long as he or she lived. After Stan and Alice have both passed away, the remaining amount left in the CRT would pay out to their favorite causes, like their church, alma maters, hospitals, or other causes they named. Stan and Alice saw themselves as generous members of the community but always held back during their lives, because they weren’t sure how much they would need for themselves. Now their CRT can provide a meaningful gift at the end of their lives after they are done spending for lifestyle needs.

Stepping away from the Stan and Alice story, we see how a Charitable Remainder Trust can be a useful tool for those looking to avoid capital gains tax on highly appreciated assets but also can be useful in avoiding income tax on highly depreciated assets or even assets that don’t warrant a tax deduction (e.g. grain). Perhaps more important, in converting an asset into a lifetime income stream, it can relieve a bit of the pressure on the unknown when, along with Social Security and any private pensions, a series of income streams can be helpful to providing retirement security well into the future.

As interest rates rise, the charitable income tax deduction for certain types of charitable trusts will increase, making the timing for a charitable tax avoidance idea even more attractive. If you would like to learn more about advanced charitable giving techniques, including those that provide lifetime income and current tax benefits, contact us to set up an Introductory Meeting.

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PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at