Triple Tax-advantaged Trusts Not Just for the Wealthy!

Download the by K. Gene Christian, BA MEA article
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September 2004

For years, most accountants have considered a Charitable Remainder Trust (CRT) only for their wealthier older clients. Today, however, that thinking has begun to change. Why? Because people in their 50s, during their peak income-earning years, have come to realize that with 30-40 years life expectancy remaining, a CRT can provide an additional tax shelter to complement their existing 401(k) plans, IRAs, and/or Keogh plans. The CRT is one more leg to place under their retirement planning stool, and they don’t have to be wealthy to take advantage of it! Consider the following story.

Scott and Judy Ward, ages 55 and 53, have professional careers. He is a CPA and she is a mortgage broker. Their two children are now out of college and their cash flow is suddenly much higher than it has ever been. Judy’s work in particular, has been very profitable during this prolonged low interest-rate environment. They continue to faithfully “max-out” their company sponsored retirement plans, their 401(k) plans, and IRAs. However, there is still a significant amount of money they would like to invest for their retirement years, utilizing existing tax shelters to the greatest extent possible. When they began to look at various options side-by-side, Scott realized that a CRT might suit them very well. There were three primary reasons why they decided to establish, and begin to annually fund a CRT.

First, and most importantly, every single dollar they place in the CRT will enjoy tax-free compounding for their remaining life expectancy. That is a huge advantage! When Scott considered every other investment option, he realized that tax-free compounding for several decades would allow their CRT to be worth more than twice as much money in the Wards’ later years compared to other, more traditional investments that would be taxed along the way.

Secondly, by funding their CRT each year, the Wards would be entitled to a charitable income tax deduction of nearly 23% of the amount they transferred. For example, each year they placed $25,000 in the CRT, they would receive a $5,750 charitable tax deduction. Scott realized that this yearly tax savings, when invested for return would grow to a large amount of money by the time the Wards needed it.

Finally, Scott calculated that the Wards’ federal and state tax bracket would remain quite high during all of their retirement years. With a careful investment strategy for their CRT, at the point Scott and Judy want to begin receiving retirement income from their CRT, the “lion’s share” of the money they receive will be taxed at long-term capital gain rates rather than higher ordinary income rates. So, if they receive payments from their CRT for 20 years, the tax savings will be very large as well.

In the final analysis, Scott and Judy determined that at least one of them would probably live to actuarial life expectancy. In other words, it was statistically probable that they would receive 35-40 years of charitable deductions, tax-free compounding, and income that would be taxed at very low rates from their CRT.

CRTs are not just for the wealthy! With careful analysis, you or your clients may be candidates for a charitable remainder trust. Comprehensive analysis can be tailored to your specific situation and provided to you confidentially for review. If you are interested in learning more about the OSCPA Educational Foundation Planned Giving Program, please contact us at 503-641-7200 / 1-800-255-1470 ext. 25 or 27 and a representative will be happy to assist you.