The capital gains tax is a tax levied on profits made through the sale or transfer of assets such as real estate, stocks, bonds, and precious metals. The capital gains tax rate varies for individuals and corporations, as well as on whether the asset was held “long term” or “short term,” and can be as high as 20%.
One important method of avoiding the capital gains tax is through the use of a “Charitable Remainder Trust,” or CRT.
A CRT is a special form of trust where you name yourself as the trustee, and a non-profit as the ultimate beneficiary upon your death, while also functioning as a beneficiary yourself for a designated number of years or for the remainder of your life. You take out as income at least 5% of the value of the CRT each year, and then when you die, the remaining trust assets (thus, Charitable “Remainder” Trust) are turned over to the charity that you chose as the beneficiary.
In addition to enabling you to secure a retirement income from assets you are donating to charity, and giving you a significant tax deduction for contributions you make to the CRT, the CRT has especially important implications for capital gains tax liability.
When you donate assets into your CRT, this makes them exempt from any capital gains tax on their appreciated value. For example, if you have stocks that you bought for $200,000, and they are now worth $700,000, if you sell them you would take a whopping capital gains tax hit on that $500,000 profit. But if instead you place these stocks in your CRT, then you pay no capital gains tax for that appreciation in value.
Furthermore, your beneficiary does not have to later pay tax on that capital gains. That is, the charity that receives the remaining assets of the CRT when you die does not owe any taxes on that $500,000 increase in value.
In addition, if the assets in your CRT increase in value after you donate them, there is no capital gains tax there either. So if the stocks that were worth $700,000 when you placed them in the CRT increase in value further to $800,000, that $100,000 growth is not subject to the capital gains tax.
CRTs do not so much allow you as a taxpayer to benefit directly by avoiding capital gains tax. They are more a way of allowing you to benefit charity rather than have to pay that money to the IRS as capital gains tax.