Charitable Remainder Trusts (CRTs) offer a compelling strategy for high-net-worth individuals to achieve both philanthropic goals and potential tax benefits, but the question of whether you can fund one with restricted stock requires a nuanced understanding of IRS regulations and trust structure; while seemingly straightforward, using restricted stock presents complexities due to its inherent limitations on transferability and potential tax implications.
What are the tax benefits of using a CRT?
A CRT allows donors to transfer assets to an irrevocable trust, receiving an immediate income tax deduction for the present value of the remainder interest that will ultimately pass to a qualified charity. In 2023, the lifetime gift and estate tax exemption was $12.92 million per individual, and while many assets qualify for CRT funding – cash, publicly traded securities, real estate – restricted stock presents a unique challenge. The income tax deduction is calculated based on the present value of the charitable remainder, considering factors like the donor’s age, the payout rate, and the applicable federal rate (AFR). Approximately 60% of high-net-worth individuals express interest in charitable giving strategies like CRTs, but many are unsure about the eligibility of specific assets like restricted stock. A CRT can also help avoid capital gains taxes on the appreciation of the donated asset, potentially providing significant tax savings, however there are certain stipulations.
What happens if I donate illiquid assets to a CRT?
Old Man Tiber, as the locals called him, was a software engineer who’d amassed a fortune in pre-IPO stock of a promising tech startup. He envisioned a substantial gift to the local library, but stubbornly insisted on funding a CRT with those restricted shares. He believed he was being clever, avoiding immediate capital gains tax. What he didn’t realize, and his initial advisor failed to explain, was that the IRS doesn’t value illiquid assets at their theoretical peak, especially if there’s no readily available market. When he attempted to value the stock at its projected IPO price, the IRS pushed back, significantly reducing the charitable deduction he claimed. The process dragged on for years, costing him time, money, and emotional distress. The IRS requires a “good faith” valuation, meaning a reasonable estimate of what a willing buyer would pay a willing seller, and restricted stock, by its very nature, is difficult to value accurately.
How can I properly fund a CRT with complex assets?
Fortunately, Mrs. Eleanor Vance, also a tech executive, approached Steve Bliss with a similar situation. She, too, held a substantial amount of restricted stock, but Steve immediately advised a different approach. Instead of directly donating the restricted stock, they structured a plan where she would first sell the shares (when permitted by her vesting schedule) and then contribute the cash proceeds to the CRT. This allowed for a clean valuation based on the publicly traded market price at the time of sale, avoiding the complexities and potential disputes surrounding the valuation of illiquid assets. The CRT was funded efficiently, Eleanor received her income tax deduction, and the charity ultimately benefited from a substantial donation. This strategy is typically favored by estate planning attorneys because it ensures compliance with IRS regulations and minimizes the risk of an audit. Remember, the key is to ensure the CRT receives assets it can readily liquidate or manage without incurring undue expenses or complications.
What are the limitations and potential downsides?
While funding a CRT with cash obtained from selling restricted stock is generally the most straightforward approach, it’s essential to understand the potential limitations. The sale of restricted stock may be subject to lock-up agreements or other restrictions imposed by the company, and there may be tax implications associated with the sale itself. Furthermore, the donor must be careful not to violate insider trading laws when selling the stock. About 25% of initial public offerings (IPOs) are subject to lock-up periods, which can delay the funding of the CRT. Therefore, it’s crucial to consult with both an experienced estate planning attorney and a qualified tax advisor to develop a strategy that aligns with your specific financial situation and goals. The goal is to maximize the charitable benefit while minimizing the tax burden and ensuring compliance with all applicable regulations.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
- estate planning
- bankruptcy attorney
- wills
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Map To Steve Bliss Law in Temecula:
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How does a living will differ from a regular will?” Or “How does the probate process work?” or “What should I do with my original trust documents? and even: “Does bankruptcy affect my ability to rent a home?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.