Posted on August 17, 2011

A Charitable Remainder Trust is a wonderful vehicle for taking Long Term Capital Gain property and converting it into Income Producing Property without the immediate tax hit from the sale of the property. You also get a nice income tax deduction for the gift into the trust.

However, there are some assets that may not be a good fit for Charitable Remainder Trusts. Caution should be used before transferring any of these assets into a CRT. Make sure to see a qualified estate planning attorney to set up and help fund the Charitable Remainder Trust

1. Assets that are Required to be Sold

If an assets is already under contract for sale, the IRS will treat the gift of that property differently than the normal rules of CRT contributions. The donor will have to report the sale and pay capital gains tax. The donor will be treated as having donated cash to the CRT. The trust is irrevocable and is not available to pay the tax liability on the sale of the asset.

2. S Corporation Stock

Charitable Remainder Trusts are not qualified shareholders for S corp status. Donating S corp. stock will disqualify the corporation and all shareholders from pass-through treatment of earnings on their shares.

3. Partnership and LLC Interests

Caution should be exercised before donating Partnership or LLC interests because they can create Unrelated Business Taxable Income – income earned from a trade or business that is not substantially related to the Charitable Trust’s purpose. This may result in taxes and penalties to the CRT.

4. Personal Residence

Donating your personal residence violates the self-dealing rules if the donor is living in or using the residence. You would also lose your Section 121 capital gains exemption upon sale of the residence.

5. Encumbered Real Estate

This is the one I get the most calls on in my office. If you donate real estate that has a mortgage on it, you will have negative tax consequences. The loan may trigger debt-financed income (income produced by assets acquired with borrowed funds), which is considered unrelated business taxable income to the CRT

6. Tangible Personal Property

Not only may the income tax deduction be limited significantly, but it may be delayed as well. No deduction may be taken until all interests and rights to possession or enjoyment of the property have expired or are held by persons other than the donor.

7. Restricted Securities.

This depends upon the type of security and the restrictions on it. There may be company specific or regulatory restrictions on the transfer. These may significantly affect the valuation of the gift, if you can do the gift at all.

8. Employee Stock Options

There may be many restrictions on your ability to transfer the options and difficulties valuing them as well. Many options are also not long-term capital assets.

Are there any other assets you can think of that may be a problem placing into a Charitable Remainder Trust? Call, send me an email, or send a comment on the Contact Us form to the left.