Home > Uncategorized > Real Estate Gifting Realized – Charitable Remainder Trusts

Real Estate Gifting Realized – Charitable Remainder Trusts

by Mary Stark Hood, JD, CFP

This fifth article in a series on real estate gifting issues covers charitable remainder trusts. The first four articles cover options when donating real estate, outright donations and bequests, bargain sales, and charitable gift annuities.

Commercial real estate professionals and their clients should consider all options when discussing the charitable donation of real property. Real Estate Gifting Realized, a new program launched by the CCIM Foundation, facilitates the donation of real estate to charitable organizations. A donation may be made directly to the CCIM Foundation or the Foundation can assist with the donation to a chosen charity.

Charitable Remainder Trusts

A charitable remainder trust is an irrevocable trust that provides for and maintains two sets of beneficiaries. First is the income beneficiary. This is typically the donor, and if married, his or her spouse. The income beneficiary receives a set percentage of income from the trust for life or a term of up to 20 years. The second is the charitable beneficiary named. This could be one or more charitable organizations that receive the principal of the trust after the income beneficiaries pass away.

Although the charitable remainder trust is an irrevocable trust, the charitable beneficiaries named can be changed at any time. Therefore, if you or a client have already established this type of trust and named your alma mater or a medical charity as a beneficiary, the list could be broadened to include the CCIM Foundation or other charitable organizations. Funding this trust with highly appreciated assets, like real estate, allows use of those assets within the trust without having to pay capital gains taxes.

Since the first beneficiary is the income beneficiary, the amount of income generated is of importance to the donor. The amount of income depends upon the payout percentage chosen and the amount of income generated within the trust. The remainder of the trust must be at least 10 percent of the fair market value of the assets transferred to the trust. That market value is determined at the time of transfer and based on the original amount of the appraised value. So, for example, if the property is appraised at $100,000.00, 10 percent or $10,000must always remain in the trust for the charitable beneficiary.

The amount paid out to the income beneficiary can be 5 percent to 50 percent of the trust funds each year as long as the appropriate amount remains in the trust for the charitable beneficiary. A higher payout percentage will lower the charitable income tax deduction. There are very specific Internal Revenue Service rules that must be complied with in terms of percentage payouts and the net fair market value of the assets so an attorney, CPA, or financial adviser should be involved in establishing the trust. Thereafter, third-party fiduciaries can handle the ongoing administration of the trust.

A charitable remainder trust is outside of the estate and additional assets can be added after it is established. The charitable deduction available depends on the type of property contributed and the type of charity named as the charitable beneficiary. Any deductions not used in the year of contribution can be carried forward five years.

Since this type of trust is irrevocable, decisions cannot be changed and naming a charity as the remainder beneficiary bypasses other heirs. Before considering a charitable remainder trust, donors should discuss the pros and cons with their advisers. The rules on charitable deductions to qualified charities are very detailed and require review at the time a charitable donation is contemplated as the rules may change or be impacted by current tax court decisions and case law.

Mary Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting services to business organizations and foundations. She currently serves as a consultant to the CCIM Foundation’s Real Estate Gifting Realized Program.

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