San Jose Estate Planning Attorney Blog

If you are not familiar with the Silicon Valley Community Foundation you are doing yourself and your clients a disservice. 

Check out their new, redesigned website at www.siliconvalleycf.org.

They are an excellent resource for charitable giving information, and they provide support and administration for various charitable trusts and foundations.  They also have an excellent Donor Advised Fund many of our clients use. 

No matter your client's situation, even if working with the community foundation or some other charitable organization, make sure that they work with a qualified charitable planning attorney to plan their gifting and create the necessary documents.

 

Yesterday I posted an article entitled 8 Assets to Avoid Placing Into A Charitable Remainder Trust. Today, I want to follow that up with 3 suggestions for assets you can consider using when you create a Charitable Remainder Trust.

Remember, each asset class is unique. You should work with your qualified estate planning attorney when setting up and funding the CRT.

1. Marketable Securities with a Low Basis and High Appreciation Potential

Selling Marketable Securities within the CRT does not trigger immediate taxation for capital gains, and the trust does not pay income tax. Any capital gains on the securities sold is deferred usually until payments are made from the trust.

2. Closely Held C Corporation Stock

The tax treatment for C Corporation stock is the same as for marketable securities discussed above. However, make sure that you comply with the self-dealing rules if you are running the corporation. If the closely held stock is not sold by the trust, it will have to be reappraised each year if you have a Charitable Remainder Unitrust.

3. Appreciated Unencumbered Real Estate

The deferral of capital gains taxes is a major plus. However, since real estate is often illiquid and may be difficult to sell, you can also use it to set up other types of CRT's like the FLIP-CRUT that don't start paying the income out of the trust until after the property is sold.

A Charitable Remainder Trust is a wonderful vehicle for taking Long Term Capital Gain property and converting it into Income Producing Property without the immediate tax hit from the sale of the property.  You also get a nice income tax deduction for the gift into the trust.

However, there are some assets that may not be a good fit for Charitable Remainder Trusts.  Caution should be used before transferring any of these assets into a CRT.  Make sure to see a qualified estate planning attorney to set up and help fund the Charitable Remainder Trust

1.   Assets that are Required to be Sold

If an assets is already under contract for sale, the IRS will treat the gift of that property differently than the normal rules of CRT contributions.  The donor will have to report the sale and pay capital gains tax.  The donor will be treated as having donated cash to the CRT. The trust is irrevocable and is not available to pay the tax liability on the sale of the asset. 

2.   S Corporation Stock

Charitable Remainder Trusts are not qualified shareholders for S corp status.  Donating S corp. stock will disqualify the corporation and all shareholders from pass-through treatment of earnings on their shares.

3.   Partnership and LLC Interests

Caution should be exercised before donating Partnership or LLC interests because they can create Unrelated Business Taxable Income –  income earned from a trade or business that is not substantially related to the Charitable Trust's purpose.  This may result in taxes and penalties to the CRT.

4.   Personal Residence

Donating your personal residence violates the self-dealing rules if the donor is living in or using the residence.  You would also lose your Section 121 capital gains exemption upon sale of the residence.

5.   Encumbered Real Estate

This is the one I get the most calls on in my office.  If you donate real estate that has a mortgage on it, you will have negative tax consequences.  The loan may trigger debt-financed income (income produced by assets acquired with borrowed funds), which is considered unrelated business taxable income to the CRT.

6.   Tangible Personal Property

Not only may the income tax deduction be limited significantly, but it may be delayed as well.  No deduction may be taken until all interests and rights to possession or enjoyment of the property have expired or are held by persons other than the donor.

7.   Restricted Securities.

This depends upon the type of security and the restrictions on it. There may be company specific or regulatory restrictions on the transfer.  These may significantly affect the valuation of the gift, if you can do the gift at all.

8.   Employee Stock Options

There may be many restrictions on your ability to transfer the options and difficulties valuing them as well.  Many options are also not long-term capital assets.

Are there any other assets you can think of that may be a problem placing into a Charitable Remainder Trust?  Call, send me an email, or send a comment on the Contact Us form to the left.