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How Does The Tax Deduction From A Charitable Remainder Trust Work?

✅ When you put assets into a Charitable Remainder Trust, you’re entitled to an immediate tax deduction worth at least 10% of the value of the assets.

Although the up-front tax deduction isn’t the biggest financial benefit of Charitable Remainder Trusts, it’s immediate and tangible — cash in your pocket this year. A good rule of thumb is that you’ll be entitle to an immediate deduction of about 10% of the value of the assets you put into your trust.

In this short article, we’ll explain how we arrive at that number and how you can put your deduction to best use.

How do you calculate the value of your tax deduction?

The tax deduction you get for putting cash or assets into a Charitable Remainder Trust is equal to the value in today’s dollars of the amount that will ultimately go to your chosen charity at the end of the trust’s term. This makes sense because the IRS is giving you credit today for a donation that you’ll make many years in the future.

So, for example, if you put assets worth $1 million into a lifetime CRT and choose the maximum payout rate available, you might expect, given a few assumptions, to leave about $1 million for charity when you pass away. Using the IRS’s interest rate (called the 7520 rate) — this month, it’s 1.6% — we can calculate the value today of that future $1 million. It’s $100,010, very close to the 10% we mentioned earlier.

How do you ensure that you receive your tax deduction?

To qualify you for your CRT deduction, we calculate the amount you expect to donate at the end of your trust. To get there, we need the current value of the trust’s assets so we can determine what they’re expected to be worth down the road.

How do we come up with that current value? Consistent with IRS rules, we get you a qualified appraisal.

  • For publicly traded stock, that’s easy: The public share price counts.
  • It’s not much more complicated for crypto: There’s a public price for each crypto asset, and although the IRS doesn’t just accept that price as the current fair-market value, we work with a qualified valuation firm to validate the number. This is a simple process since most crypto assets have sufficient trading volume to make valuing them straightforward.
  • If you have less liquid assets — startup equity or other private equity, for example — the qualified appraisal is a bit more involved. We still work with a third-party valuation firm, but the valuation process involves a more complete review, kind of like a slimmed-down version of the one a company will commission when it needs a new 409a valuation.

How to use your tax deduction?

For most people, this is easy: You can use your deduction to write off your income that is subject to the highest tax rate. This is usually ordinary income and short term capital gains, which are taxed at the highest rates. So if you have a $100,000 deduction and income subject to 50% federal and state taxes, you could expect to save $50,000 on your taxes this year.

Plus, if your deduction is so big that you can’t use it all in one year — nice problem to have! — you can carry all or part of it forward for up to five years.

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