❗ Key Takeaway: To take advantage of the particular magic of the CRT structure, it makes sense to fund your trust with assets that are likely to grow substantially in value relatively soon, and in most cases, you can then use the money in your CRT to invest in the same assets you would have in a regular taxable account.
Investing to take advantage of the CRT
Trust planning, and Charitable Remainder Trusts (CRTs) in particular, are tailor made for deferring, minimizing, or even eliminating capital gains taxes on highly appreciated assets. And those gains can be huge: You can save as much as 40% on your taxes at exit if you live in a high-tax state, and that can translate to additional gains of 100% or more over the life of a trust. Beyond the question of initial funding–which assets should go into a CRT at the beginning–many of our customers are active investors and are curious about what sorts of assets they can invest in with the money that is inside their CRT. In this post, we’ll focus on those two related questions; we’ll explain why certain assets are a good fit for a CRT, and we’ll offer a few tips and tricks for maximizing your returns.
What types of assets can you put into a CRT?
Because Charitable Remainder Trusts derive most of their value from their tax-deferred status, it makes sense to use these vehicles to protect assets that have already appreciated substantially or are likely to in the near future. Since the CRT is tax-exempt, the appreciated assets can be sold without an immediate tax bill. This is the main value of a CRT, and you can read more about it here.
Drilling down a bit, within the category of assets that have appreciated substantially (or are expected to do so), users typically consider six main asset categories for funding: (1) publicly traded securities (like ETFs and shares in individual public companies), (2) closely held stock (like startup and small business equity), (3) cryptocurrencies, (4) real estate, (5) alternative securities (like private equity and hedge fund assets), and (6) art. (You can also gift cash to a CRT, but the main benefit of doing so is that it allows you to pay trust expenses and invest in other securities without having to sell trust assets to generate liquidity.)
What type of assets can a CRT invest in?
Say you fund your CRT with startup equity, and you reach an IPO. You’d like to sell your holdings, and you can do so within the CRT by offloading your startup shares for cash without paying any taxes at the time. But what next? For most of our users, this is an opportunity to diversify. You’re now sitting on a significant pile of cash, and it makes sense to get that money into a portfolio of investments. What can (and should) that portfolio look like?
Beyond diversification into a modern portfolio of assets, the only thing to keep in mind is that a CRT can invest in the same asset categories that can be used to fund it. What that means is that, with a few limitations, you can invest in all kinds of stock, crypto, real estate, alternative assets, and art. Depending on the structure of your trust–lifetime or term, NIMCRUT or Flip CRUT, how many beneficiaries?–some of these assets might make more sense than others, and we’d love to talk to you more about your options.
Aside from those questions about structure, there are a few limitations limitations on CRT investment strategy: CRT trustees are required to follow the “prudent investor rule”, which states that trustees must act in the best interest of all beneficiaries. What this means in practice is that trustees like Valur generally default to a diversified portfolio of assets–“modern portfolio theory,” to use a bit of jargon–when choosing investments. Trustees are also required to avoid “self dealing,” which is when a trustee invests assets for the benefit of only some of the beneficiaries–for example, by buying a house for one of the beneficiaries to live in.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.