A couple lives well on their incomes, but the biggest asset they own is a tract of unimproved real estate that the wife received from her parents many years ago. The land was part of the family’s farm and is located in prime area that is growing in value.
The couple is looking for ways to supplement their retirement income, which is based solely on their retirement accounts.
What can they do to generate retirement income and not have to pay a significant proportion of their profit in capital gains? The solution is presented in the article “Using Charitable Trusts in Your Retirement Planning” from Richardland Source.
One strategy would be to establish a Charitable Remainder Trust or CRT. The wife would transfer the land to an irrevocable trust created to provide lifetime payments to her and her husband. At the death of the surviving spouse, the trust property would be transferred to a charitable organization named in the wife’s trust agreement.
Using the CRT, the trustee can sell the trust property and reinvest the proceeds without having to pay any immediate tax on the gain. The couple would have more money for retirement than if they simply sold the land and invested the proceeds. They also have the option of investing their tax savings outside of the trust to produce additional income.
The CRT can be either an annuity trust or a unitrust. The type of CRT used will determine how payments from the trust are calculated. If a Charitable Remainder Annuity Trust (CRAT) is chosen, the couple will receive annual payments of a set percentage of the trust’s initial fair market value. The percentage will need to be at least 5% and may not be more than 50%.
If they choose a Charitable Remainder Unitrust (CRUT), they would receive an annual income based on the fair market value of the trust property, which is revalued each year. That percentage must be at least 5% and not more than 50%.
These are complex legal strategies that need to be considered in tandem with an overall estate and tax plan. Speak with an experienced estate planning attorney to learn if using CRTs would be a good strategy for you and your family.
Reference: Richardland Source (October 28, 2019) “Using Charitable Trusts in Your Retirement Planning”