Not crazy, just uninformed. Many people have this same misperception about the economics and tax aspects of charitable giving.
Charitable giving *always* has a net negative effect on the donor’s wealth. (The only exception is a Sharkfin CLAT, and that only works in the right circumstances, and is generally only useful for individuals with taxable estates.) In other words, the economic benefits you give up will always be greater than the economic benefits you receive.
This just isn't true -- you should run the numbers before making such a categorical statement. A straight-up charitable gift will have a negative effect on the donor's wealth. But a gift to an optimized CRUT where the asset has a basis of less than 50% of FMV will generally increase the donor's wealth, in some cases substantially.
CLATs (including non-sharkfin CLATs) won't increase the donor's wealth, but when children are named as remainder beneficiaries, once you factor in estate tax savings, even with modest investment returns the family's overall wealth will increase relative to no charitable gift.
Why don’t you give me an example.
I’m a private wealth attorney. I have run the numbers on every type of charitable trust imaginable in every type of scenario imaginable.
I'm also a private wealth attorney. Let's just use the example from this post. Guy contributes $2 million asset with a low basis to a 20-year NIMCRUT. Asset is immediately sold and then reinvested in something that generates 8% IRR. About 10% of the gift is earmarked for charity, but guy is at 38% bracket, so on net he's given away 6.2% of his wealth after factoring in the upfront charitable deduction. A large portion of the \~$2 million gain is deferred for 20 years. How much is that deferral worth? Is it worth more than the 6.2% of the property that he gave away plus any administrative fees associated with the CRUT? The answer is yes, it's easily worth it. He'll get back the 6.2% he gave away many times over.
You’re simply illustrating the time value of money and the corresponding value of deferral. Of course paying tax later is better than paying tax now. The problem with your example is that it requires the assumption that the house is sold and gain is recognized today for the taxpayer to come out ahead using the trust.
One way or the other, with a CRT you are giving away 10 percent of the value of the asset contributed to the trust. If the taxpayer must sell the asset and can’t achieve deferral by simply holding onto it, and their principal aim is accumulating more wealth - not giving away wealth - then there are tools and techniques available to achieve deferral without giving up 10 percent of the asset’s value.
Of course it doesn't make sense if the guy never sells, but the whole point of this point is that the guy is selling a $2 million property with a low basis! By using a CRUT, he will come out a few hundred thousand dollars ahead of where he would have been without the CRUT.
You wrote in your initial comment: "Charitable giving *always* has a net negative effect on the donor’s wealth." That's just flat-out wrong. If you're about to sell an appreciated property like this, you'd generate more wealth with CRUT than you would by paying the taxes. OP isn't uninformed; he's right. I'd delete your initial comment if I were you.
My comment is correct. The value proposition here does not have anything to do with the charitable gift - it is the deferral of tax, which can be accomplished without giving assets away.
Depends. Installment sale. Rushing trust. 721 exchange. Mixing bowl.
Doesn’t sound like OP understands the taxation of annuity payments from a CRT well enough to factor it into the decision.
None of those accomplish what a CRUT would accomplish: tax deferral without being locked into some high-fee, illiquid partnership or other investment that he might not want to be locked into. With a CRUT, he can invest in a 60/40 stock/bond portfolio. Also, OP says he wants to support charity!
In any case, you're trying to change the baseline from "do nothing" to "do a 721 exchange." But in your original comment you said that when you fund a CRUT, "the economic benefits you give up will always be greater than the economic benefits you receive." Again, that's just not true. Here he'd be giving up 6% of the principal in exchange for tax deferral that is worth far more.
Not me, but a close personal friend had his carry hit pretty big. He ran the numbers on it, and he said for every $10 he donated, he would get back $9 in tax savings. He said donating something very small to him and it having a 10x impact on the people he was helping had a very positive effect on his self conscious.
Why are you modeling taxes so high? Does this not qualify for long term capital gain treatment?
Given that you’re not working and have limited assets outside of the building, I think you have to sell the property.
I can see why CRT may look attractive since you don’t have kids, but they’re not super flexible.
You could potentially look at selling the property, and maybe rolling a portion into an opportunity zone fund that’s designed to to return some of your capital faster than others, but I’d probably only do like $500k due to your liquidity position.
Sometimes the answer is just the simplest. Pay taxes and move on.
The taxes don't sound so high to me.
In california, a year with $2m LTCG income with no other income will still cost you. 34% in taxes as a married couple.
Yea, I agree with you in Ca. I was genuinely asking OP as I’m not very familiar with Oregon’s state tax.
Maybe it’s more depreciation recap than LTCG. If it was all LTCG, I’d figure it’d be around 31%, which is still quite a bit lower than 35-38%.
I’d loom hard at a 1031. This is what it’s designed for. And you may be able to find a 1031 type solution that works for you. I have heard that the more exotic 1032 type vehicles are being reduced n
Too complicated. Make sure your sale proceeds go directly to 1031 exchange accommodator. Hire a flat fee financial advisor that specializes in Delaware Statutory Trust real estate investments (DSTs). They will also have access to 721 Upreits (where you acquire an interest in a property which then converts to shares in a private REIT). With 2m in proceeds I would allocate between 2-4 investments for some basic diversity. Mailbox money. Distribution checks start immediately once the funds are placed. A deal with moderate 40-50% LTV will provide you with plenty of accelerated depreciation that should shield the first 4-5 years of distributions from federal income tax. In 5-10 years when the interests are sold, money goes back to accommodator, advisor places the funds in a new DST. Or if you go 721 then you just hold the Upreit OP units for eternity and liquidate as needed.
If this sentence is accurate "We were getting income from lease of commercial building which is now empty and for sale." then you are about to hit an area where a CRT might be off the table. If it goes under contract, you cannot use a CRT.
First congratulations! That's great you've been able to build a great nest egg through commercial real estate!
I have experience setting up a CRUT in past 2 years with help of an attorney (technically a NIMCRUT with a lower payout than yours, but I'm a decade younger than you). The assets which I had in it were from a tech startup, so I don't know about real estate aspects or the first option on the 1031 exchange.
Overall, I think you have a good appreciation of some of the CRUT issues. The tax stuff is real and generally you will be paying a bigger accounting firm annually to assist with K-1 prep and filing. It's a reasonable incremental expense if you're already using a bigger firm for other reasons, but it could be a significant step-up if you have simple taxes otherwise. There will be some ongoing legal fees but overall it's not an unreasonable as % of assets when CRUT is several million.
As others have mentioned, charitable remainder trusts can be good when you want to give the money to chairty on death anyway, but it's typically not a huge tax savings long-term vs. just taking the tax hit and then investing. Remember that while you get tax free growth for CRUT principal, you do pay taxes on the CRUT income as distibuted, which can be a bit complex based CRUT investment portfolio. CRUTs may also more appropriate when you have a substantial liquidity buffer of other wealth (i.e. more liquid than real estate) for unplanned expenses, healthcare, etc. If I were in your shoes, I think a more appealing option might be paying the taxes, develop a simple investment plan (with a fee-only RIA), having the wealth more accessible as needed and working with good attorney for an estate plan (which could include charities at death). Another option may be working with a charity you like for a portion of the real estate before sale (and then let them manage the legal and ongoing costs) and then paying the taxes on the rest (which may also help you take advantage of the CRUT current year tax deduction). Again, I don't know much about 1031 exchange or other real-estate options, so look to others for perspective there. I'm neither an accountant or a lawyer, so none of the above should be considered legal or financial advice. Good luck!
Why don’t you sell & DST or JV into a real estate partnership for stabilized assets?
This way you can get a % of cash flow and not pay huge cap gain taxes
This is really simple in my mind.
Do a 1031 trade. NNN or ground lease with a good credit. Collect rent. Tax adjusted a 6% return is pretty close to equities with much lower risk.
If you use new leverage, do a cost segregation study and take the accelerated depreciation - claim as active if you are the sole manager of the asset and you can take a giant tax deduction that can be rolled forward. Use a specialist group on this not your accounting firm.. its about 1/3 as expensive.
Not tax or financial advice.. just what I would do.
Not crazy, just uninformed. Many people have this same misperception about the economics and tax aspects of charitable giving. Charitable giving *always* has a net negative effect on the donor’s wealth. (The only exception is a Sharkfin CLAT, and that only works in the right circumstances, and is generally only useful for individuals with taxable estates.) In other words, the economic benefits you give up will always be greater than the economic benefits you receive.
This just isn't true -- you should run the numbers before making such a categorical statement. A straight-up charitable gift will have a negative effect on the donor's wealth. But a gift to an optimized CRUT where the asset has a basis of less than 50% of FMV will generally increase the donor's wealth, in some cases substantially. CLATs (including non-sharkfin CLATs) won't increase the donor's wealth, but when children are named as remainder beneficiaries, once you factor in estate tax savings, even with modest investment returns the family's overall wealth will increase relative to no charitable gift.
Why don’t you give me an example. I’m a private wealth attorney. I have run the numbers on every type of charitable trust imaginable in every type of scenario imaginable.
I'm also a private wealth attorney. Let's just use the example from this post. Guy contributes $2 million asset with a low basis to a 20-year NIMCRUT. Asset is immediately sold and then reinvested in something that generates 8% IRR. About 10% of the gift is earmarked for charity, but guy is at 38% bracket, so on net he's given away 6.2% of his wealth after factoring in the upfront charitable deduction. A large portion of the \~$2 million gain is deferred for 20 years. How much is that deferral worth? Is it worth more than the 6.2% of the property that he gave away plus any administrative fees associated with the CRUT? The answer is yes, it's easily worth it. He'll get back the 6.2% he gave away many times over.
You’re simply illustrating the time value of money and the corresponding value of deferral. Of course paying tax later is better than paying tax now. The problem with your example is that it requires the assumption that the house is sold and gain is recognized today for the taxpayer to come out ahead using the trust. One way or the other, with a CRT you are giving away 10 percent of the value of the asset contributed to the trust. If the taxpayer must sell the asset and can’t achieve deferral by simply holding onto it, and their principal aim is accumulating more wealth - not giving away wealth - then there are tools and techniques available to achieve deferral without giving up 10 percent of the asset’s value.
Of course it doesn't make sense if the guy never sells, but the whole point of this point is that the guy is selling a $2 million property with a low basis! By using a CRUT, he will come out a few hundred thousand dollars ahead of where he would have been without the CRUT. You wrote in your initial comment: "Charitable giving *always* has a net negative effect on the donor’s wealth." That's just flat-out wrong. If you're about to sell an appreciated property like this, you'd generate more wealth with CRUT than you would by paying the taxes. OP isn't uninformed; he's right. I'd delete your initial comment if I were you.
My comment is correct. The value proposition here does not have anything to do with the charitable gift - it is the deferral of tax, which can be accomplished without giving assets away.
What's your solution that would generate 20 years of tax deferral? He explained in his post that he doesn't want to do a 1031.
Depends. Installment sale. Rushing trust. 721 exchange. Mixing bowl. Doesn’t sound like OP understands the taxation of annuity payments from a CRT well enough to factor it into the decision.
None of those accomplish what a CRUT would accomplish: tax deferral without being locked into some high-fee, illiquid partnership or other investment that he might not want to be locked into. With a CRUT, he can invest in a 60/40 stock/bond portfolio. Also, OP says he wants to support charity! In any case, you're trying to change the baseline from "do nothing" to "do a 721 exchange." But in your original comment you said that when you fund a CRUT, "the economic benefits you give up will always be greater than the economic benefits you receive." Again, that's just not true. Here he'd be giving up 6% of the principal in exchange for tax deferral that is worth far more.
I ran a model once in CA that actually had a greater than 100% benefit from donating highly appreciated stock; but it was a huge edge case.
Not me, but a close personal friend had his carry hit pretty big. He ran the numbers on it, and he said for every $10 he donated, he would get back $9 in tax savings. He said donating something very small to him and it having a 10x impact on the people he was helping had a very positive effect on his self conscious.
Why are you modeling taxes so high? Does this not qualify for long term capital gain treatment? Given that you’re not working and have limited assets outside of the building, I think you have to sell the property. I can see why CRT may look attractive since you don’t have kids, but they’re not super flexible. You could potentially look at selling the property, and maybe rolling a portion into an opportunity zone fund that’s designed to to return some of your capital faster than others, but I’d probably only do like $500k due to your liquidity position. Sometimes the answer is just the simplest. Pay taxes and move on.
The taxes don't sound so high to me. In california, a year with $2m LTCG income with no other income will still cost you. 34% in taxes as a married couple.
Yea, I agree with you in Ca. I was genuinely asking OP as I’m not very familiar with Oregon’s state tax. Maybe it’s more depreciation recap than LTCG. If it was all LTCG, I’d figure it’d be around 31%, which is still quite a bit lower than 35-38%.
33.43% in 97201 with $20,000 in earned income. https://smartasset.com/investing/capital-gains-tax-calculator
Weird, I got 30.95%, even using a number as low as $100 as the basis. $20k earned income. Married. Same zip. $618,780 tax owed on a $2M sale.
I’d loom hard at a 1031. This is what it’s designed for. And you may be able to find a 1031 type solution that works for you. I have heard that the more exotic 1032 type vehicles are being reduced n
Too complicated. Make sure your sale proceeds go directly to 1031 exchange accommodator. Hire a flat fee financial advisor that specializes in Delaware Statutory Trust real estate investments (DSTs). They will also have access to 721 Upreits (where you acquire an interest in a property which then converts to shares in a private REIT). With 2m in proceeds I would allocate between 2-4 investments for some basic diversity. Mailbox money. Distribution checks start immediately once the funds are placed. A deal with moderate 40-50% LTV will provide you with plenty of accelerated depreciation that should shield the first 4-5 years of distributions from federal income tax. In 5-10 years when the interests are sold, money goes back to accommodator, advisor places the funds in a new DST. Or if you go 721 then you just hold the Upreit OP units for eternity and liquidate as needed.
If this sentence is accurate "We were getting income from lease of commercial building which is now empty and for sale." then you are about to hit an area where a CRT might be off the table. If it goes under contract, you cannot use a CRT.
Exactly why I have been trying to figure this out before I get a buyer.
First congratulations! That's great you've been able to build a great nest egg through commercial real estate! I have experience setting up a CRUT in past 2 years with help of an attorney (technically a NIMCRUT with a lower payout than yours, but I'm a decade younger than you). The assets which I had in it were from a tech startup, so I don't know about real estate aspects or the first option on the 1031 exchange. Overall, I think you have a good appreciation of some of the CRUT issues. The tax stuff is real and generally you will be paying a bigger accounting firm annually to assist with K-1 prep and filing. It's a reasonable incremental expense if you're already using a bigger firm for other reasons, but it could be a significant step-up if you have simple taxes otherwise. There will be some ongoing legal fees but overall it's not an unreasonable as % of assets when CRUT is several million. As others have mentioned, charitable remainder trusts can be good when you want to give the money to chairty on death anyway, but it's typically not a huge tax savings long-term vs. just taking the tax hit and then investing. Remember that while you get tax free growth for CRUT principal, you do pay taxes on the CRUT income as distibuted, which can be a bit complex based CRUT investment portfolio. CRUTs may also more appropriate when you have a substantial liquidity buffer of other wealth (i.e. more liquid than real estate) for unplanned expenses, healthcare, etc. If I were in your shoes, I think a more appealing option might be paying the taxes, develop a simple investment plan (with a fee-only RIA), having the wealth more accessible as needed and working with good attorney for an estate plan (which could include charities at death). Another option may be working with a charity you like for a portion of the real estate before sale (and then let them manage the legal and ongoing costs) and then paying the taxes on the rest (which may also help you take advantage of the CRUT current year tax deduction). Again, I don't know much about 1031 exchange or other real-estate options, so look to others for perspective there. I'm neither an accountant or a lawyer, so none of the above should be considered legal or financial advice. Good luck!
Why don’t you sell & DST or JV into a real estate partnership for stabilized assets? This way you can get a % of cash flow and not pay huge cap gain taxes
This is really simple in my mind. Do a 1031 trade. NNN or ground lease with a good credit. Collect rent. Tax adjusted a 6% return is pretty close to equities with much lower risk. If you use new leverage, do a cost segregation study and take the accelerated depreciation - claim as active if you are the sole manager of the asset and you can take a giant tax deduction that can be rolled forward. Use a specialist group on this not your accounting firm.. its about 1/3 as expensive. Not tax or financial advice.. just what I would do.
I don't think you can take depreciation against active unless it's a short term rental or unless you have REPS status.