The basic question is about gift tax and generation skipping tax on distributions to non-spouse individuals. If you keep the amount of annual payments below the annual gift tax exemption (currently $18K) do you avoid those taxes.
H&R Block has confirmed yes, you do avoid those taxes (and reporting requirements) by keeping payments below that threshold. That confirms info in some of the better books on the subject.
I found it useful that H&R Block has staff at their offices ready to answer your questions–for free if you use their tax preparation services. Or they will research topics for you for $50/hr–inexpensive compared to what CPAs can charge. Mine was done by an enrolled agent.
It has been quite a slog to get over all the hurdles to put a CRUT in place. I got serious about it in April after talking to a lawyer. We are not quite there yet, but I’m hoping by Aug 1 to get it all done. What’s that four months of details? Takes lots of patience working with these folks.
H&R Block should have also told you that unless your total gifts over your lifetime documented on Form 709 f709.pdf (irs.gov) exceed the lifetime gift tax exemption limit ($13.61MM in 2024), you won’t owe any taxes when you exceed the annual limit ($18k in 2024) - you just need to document the gifts on Form 709.
For nearly everyone, big thing about exceeding the annual limit is the documentation, not the taxes.
I would also point out that under current tax law, the lifetime exemption limit will be cut by about 50% as of Jan 1, 2026.
Yes, many do not need to worry about the gift tax as they are very far from the $13.61MM exemption for singles or $27.22MM exemption for married couples. But I have the problem of owning lots of Nvidia stock and suddenly I am looking at over $1MM in estate tax liability.
Most things you do to reduce estate tax liability directly reduce that $13.61MM exemption. Charitable remainder trust is an exception. It does not reduce the exemption, pays my heirs as beneficiaries nice income (over 20 yrs), and I pay no capital gains on it. Counting the reduction in estate taxes and the charitable deduction, I expect to get about $2.22 in benefits for every dollar put into the trust.
I will point out if that’s based on the $13.61MM exemption and the law doesn’t change, your estate will owe a lot more if you don’t die by Dec 31, 2025. So you better structure your trust so that it’s either based on an exemption that’s closer to $7MM, or so that you can add to the trust in December 2025.
Yep. Talked to lawyer who wants to wait to see what changes after the election. He also read me the riot act about irrevocable trusts increased taxes, loss of stepped up basis, and loss of control. Charitable Remainder Trust is only the first step but has attractive features for the future and gives me some breathing room. I think sitting on a million dollar estate tax liability is irresponsible. I should do better than that.
Well, I would point out that to have a $1MM estate tax liability, your estate must be in excess of $16MM, so a $1MM liability is only about 6% of your estate.
Sure, if you can do something about it, it’s a great idea to take advantage of all the tax rules that can help you avoid the estate tax, and ensure that your money goes to support things that you want to support. But it’s really a first world problem.
But that’s only if death is happening soon. If death is in 7 or 8 years, that $16M could be $30M, and if it’s in 15 years, it could be $50M+. So moving a bunch of assets out of the estate may indeed be prudent because it potentially could be a lot higher than 6% tax.
Still a first world problem. As I said, if you can take advantage of tax rules to decrease the tax, and direct your estate to entities you want to support, then it’s prudent to do so.
I would point out that this particular trust is a CRUT (Charitable Remainder UniTrust), which is required to distribute out at least 5% a year. If the portfolio grows that much, the taxes on those distributions will be substantial. Trading a 40% estate tax for a distribution that pushes you into a max of a 37% tax bracket (under current law) does save some money. But it also pulls the tax liability forward, rather than deferring the taxes until after the grantor dies.
This is a very good point! If one experiences longevity, that 5% distribution will grow substantially and the taxes paid, accounting for time value of money, could possibly even exceed the estate tax that might be due at the end.
I’d argue that ALL tax planning is a first world problem. Outside those parts of the world, tax systems are substantially different.
Most people use CRUTs to convert assets to an income stream. Then gift tax does not apply.
I’m using CRUT to distribute assets to my heirs. Thats the reason for gift tax and gst concerns. They get $18k per year for 20 years. A nice downpayment on inheritance. But yes its taxable income to them, not to me. And i am told trust pays capital gains but out of charity portion not mine. Yes mine is a 7% CRUT. Money is invested and should double. My heirs receive more than i put in.
No one knows how tax law might change over the next years. Best might be irrevocable trust where you can add funds from time to time and funds there can grow without increasing estate tax. But starting fund are a gift against your exemption. Benefit grows over time.
Some think Trump might eliminate estate tax. That might also eliminate gift tax. A whole different world. But don’t hold your breath. Strong opposition and people who want to raise taxes on wealth.
Lawyer thinks next year will be busy with Trump tax law due to expire. Plan ahead. It may take months to get an appointment.
The distribution consumes 7% of trust assets per year. To increase assets must earn more than 7% per year. And a bad stock year can reduce payments. Assets value on the last business day of January are used to determine pay out quarterly for the year. All surviving beneficiaries share equally in the 7%.
The annual gift tax exemption is adjusted for inflation every year. Last year increased by $1000. Keeping distributions below the exemption is a bit of a horse race but if exceeded i think amounts will be small.
The hypothetical proposed was based on a 10% increase a year (close to the S&P historical average), so the portfolio would be growing under that scenario.
The exemption increases in $1000 increments. Don’t expect an increase for 2025, since the inflation rate is currently about 3% It will take 2 years of a 3% increase to boost it by another $1000, so maybe in 2026 . But if the Fed gets down to their 2% target rate, it would take 3 years.
Its an irrevocable trust but one advantage is you can add more funds later. That can be useful if the numbers become more favorable in the future.
There are also Charitable Remainder Annuity Trusts. I have not looked into them. Perhaps better suited to lifetime income. Funds cannot be added. Usually a lifetime contract for self or spouse.
Could probably be used to provide income until you reach Social Security age.
It’s often said that CRUT distributions are “WIFO” - Worst In, First Out. So the distributions will distribute in this order:
Ordinary Income
Capital Gains Income
Any Other Income
Principal (Trust Corpus)
The CRUT can minimize ordinary income by investing in assets that will produce only capital gains, but then it risks growing the portfolio significantly, as it’s generally assets like bonds that distribute ordinary income, while assets that produce capital gains and/or qualified dividends are ones that tend to grow. If the CRUT balance grows significantly, distributions to beneficiaries other than the grantor and the grantor’s spouse may outrun the gift tax exemption limits and be subject to gift tax in addition to the income taxes.
Thanks, AJ. The money gets invested in the university endowment fund which is managed by TIAA. It has a relatively high expense ratio of 0.4% or so and the university gets 0.25% to do all the paperwork. I think the various fund categories are composited rather than separated as you describe.
They have said they will get 1099s but we shall see.
Yes, the 0.65 over 20 yrs is quite a chunk. I think Vanguard or Fidelity would do it for less than 0.1%. I have pointed this out to them but we all know politics.
The 0.25 is for record keeping, issuing checks, doing trust tax returns, etc. Cost seems reasonable. I think a CPA would charge more to do that.
I estimate the cost of providing the service at about $3K. That’s based on a $40K clerk supervised by a $100K professional spending a half day at it four times a year.
