Managing appreciated assets can be a challenge for multiple reasons. If you are looking to take an appreciated asset and turn it into retirement income or benefits for your children and grandchildren, your first thought might be to sell the asset and reinvest the money into something else. 

However, while this might be the simplest approach, it is usually not the most financially wise. If you sell your appreciated asset, the government will then subject that asset to capital gains tax. Depending on a variety of factors, including your tax bracket status and current income, you can lose up to 20% of your appreciated assets value if you simply sell it with the goal of reinvesting.

Fortunately, there are other options that can help you avoid capital gains tax and help you maximize the utility of your appreciated assets. One potential option is to create a Charitable Remainder Annuity Trust (CRAT). 

What is a CRAT? 

This type of living trust is an irrevocable living trust. This means that any assets you put into this trust then become the property of the trust and are no longer your direct assets. While this may sound like a negative, in reality, it will help you lower the amount of income taxes you pay on your assets while you are alive, and it will also reduce the amount of income taxes that the government takes from your estate when you die.

How does a CRAT work? 

A CRAT involves naming a charity of your choice as the eventual recipient of the asset values. However, the asset itself will remain in the trust until you die. Once you create the trust, a fixed amount of income, usually between 5 and 10%, will come from the trust annually. This fixed percentage income can go to the donor (you) or a named income beneficiary of the trust (your spouse, your children, etc.). 

What are the direct benefits of a CRAT? 

Specific benefits that a CRAT offers are that you completely avoid capital gains tax when you reinvest your initial appreciated asset into one. Additionally, not only do you not have to pay capital gains, you also get a current tax deduction since you are technically making a donation to a charity. The amount of the tax deduction depends on how old the last income recipient attached to the CRAT is and what percentage of payout the donor (or named beneficiaries) get from the CRAT. 

It is highly likely that the income you can potentially get from a CRAT is greater than what you would be able to get from selling your original appreciated asset and trying to reinvest it. The fact that a CRAT is an irrevocable trust means that upon your death, the government will not be able to subject the appreciated asset to estate taxes in some cases. 

Additionally, you will also be able to benefit a charity of your choosing upon your death. There are many charitable organizations that seek out individuals interested in participating in CRATs. These can include professional organizations, universities/colleges and political organizations. 

To learn more about CRATs and how they can benefit you, contact us today at AmeriEstate.