Tackling the Challenges of a Concentrated Position by Creating a CRUT
April 26, 2018
Silicon Valley is home to countless entrepreneurs who have created significant wealth, all concentrated in a single stock with very low cost basis. These positions can be quite volatile and often do not generate much income, if at all. Also, by selling the shares, the individual is faced with what can be sizeable capital gains tax consequences, thus reducing the amount that can be reinvested into a more diversified portfolio.
If you are one of these individuals who also considers philanthropy a priority, establishing a charitable remainder unitrust (CRUT) and funding it with a portion of your low cost stock may be an effective tool to address these challenges. Its purpose is to convert your existing stock into a diversified income-producing vehicle for a set period of time while avoiding capital gains tax on the appreciation, and with the added bonus of providing you with a current income tax deduction for the charitable donation.
So how does it work? Create a trust and transfer the property you wish to remove from your portfolio. Name one or more charities to be the ultimate beneficiary of the donated assets. The charity must have tax-exempt status as defined by the Internal Revenue Code. You will receive a current tax deduction equal to the present value of the charity’s right to receive the trust assets in the future. If you cannot fully use the deduction in the first year, you can carry it forward for up to five additional years. The trust pays you (or someone you designate) an income stream for a certain number of years or your whole life, as specified in the trust document. Also noted in the trust document is the amount of payment you receive based on a percentage of the trust balance, revalued annually. The percentage must be at least 5%, and the higher the payout rate, the lower the income tax deduction. At your death or the end of the period, the remaining assets held in the trust pass to the designated charity.
Once the property is contributed to the trust, it can be sold free of capital gains taxes, thereby preserving the full fair market value of the assets. And if your net worth is large enough to be considered a taxable estate, once the gift is made, the property is not included in your estate for purposes of determining your estate tax.
In the year that the CRUT is established, it is an opportune time to sell additional shares of your low cost stock. Depending on your adjusted gross income for the year, some or all of the capital gain generated from the sales can be offset by the tax deduction created when donating the stock to the CRT, allowing you broader diversification.
There are other variations of charitable trusts that exist with options, such as the ability to postpone the income stream until later (“NIMCRUT” – Net Income with Makeup Charitable Remainder Trust), or to receive a fixed dollar amount each year (“CRAT” – Charitable Remainder Annuity Trust). Importantly, once you have funded the charitable trust, you give up legal control of this property irrevocably. To provide the greatest chance that you achieve your financial goals, be sure to visit with your Wealth Manager to determine the best type of trust and the appropriate amount to donate.
Disclosure:
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