Charitable Remainder Trusts (CRTs) can, under certain circumstances, cover expenses related to dissolving a private foundation, but it’s a nuanced area requiring careful planning and adherence to IRS regulations. A CRT is an irrevocable trust that provides an income stream to the grantor (or other designated beneficiaries) for a specified period, with the remainder going to a designated charity or charities. While the primary purpose of a CRT isn’t foundation dissolution, it can be strategically incorporated as part of the process, offering tax benefits and simplifying the wind-down. It’s crucial to understand that the expenses must be “ordinary and necessary” to the administration of the trust and directly related to the charitable remainder interest, not simply costs of closing the foundation itself. According to IRS Publication 560, expenses like trustee fees, legal accounting, and investment management are typically deductible, provided they’re reasonable and incurred for the trust’s benefit.
What are the tax implications of using a CRT for foundation dissolution?
Using a CRT to handle assets during foundation dissolution can unlock significant tax benefits. When a private foundation dissolves, its assets are generally subject to excise taxes if distributed to non-charitable recipients. However, transferring those assets to a CRT can avoid those taxes, as the CRT qualifies as a charitable recipient. The grantor receives an immediate income tax deduction for the present value of the remainder interest – the portion of the trust that will eventually go to charity – which is calculated using IRS life expectancy tables and the applicable Section 7520 rate (currently around 4.8% in 2024). This deduction is limited to 50% of the grantor’s adjusted gross income, with any excess carried forward for up to five years. Furthermore, any capital gains on appreciated assets transferred to the CRT are avoided, as the trust itself is tax-exempt. Approximately 65% of all foundations close due to administrative burdens according to the National Center for Charitable Statistics.
How does a CRT simplify the dissolution process?
Dissolving a private foundation involves numerous administrative tasks, including finalizing accounts, notifying the IRS, and distributing remaining assets. A CRT can streamline this process by centralizing the management and distribution of assets. Instead of directly liquidating assets and distributing them, the foundation transfers them to the CRT, which then manages the investments and distributes income to the beneficiaries. This avoids the need for ongoing foundation administration and simplifies the final accounting. The trustee of the CRT assumes responsibility for managing the assets and complying with all relevant regulations. A well-structured CRT can also provide for a phased distribution of assets, allowing the foundation to fulfill any outstanding commitments or pledges before completely winding down. For instance, if a foundation had committed $100,000 over five years, the CRT could be structured to continue making those payments even after the foundation is formally dissolved.
What went wrong for the Harringtons and their foundation?
Old Man Harrington, a self-made man with a stubborn streak, started the ‘Harrington Helping Hands’ foundation to support local animal shelters. He never bothered with proper legal guidance, figuring he “knew what he was doing.” When his health began to fail, he decided to close the foundation, leaving a paltry $30,000 remaining. Without a clear plan, he attempted to distribute the funds directly, but the IRS flagged the distribution as potentially taxable, as it lacked proper documentation and charitable intent. The IRS imposed penalties, effectively wiping out a significant portion of the remaining funds and creating a legal nightmare for his family. They spent months trying to untangle the mess, paying legal fees that far exceeded the original amount left in the foundation. His daughter, Sarah, lamented, “Dad always thought he could cut corners, but this cost us dearly. If he had consulted an attorney experienced in foundation dissolution, we could have avoided this whole ordeal.”
How did the Andersons’ situation work out with a CRT?
The Andersons, facing a similar situation, did things differently. After years of philanthropic work, their family foundation was ready to close. They consulted with Steve Bliss, an estate planning attorney specializing in charitable giving. Steve recommended a CRT as a way to manage the remaining assets and maximize their charitable impact. They transferred $500,000 to a CRT, naming their children as income beneficiaries for 10 years, with the remainder going to their favorite local university. This not only avoided the excise taxes on direct distribution but also provided a steady income stream for their children. Furthermore, the university benefited from a significant future gift. “Steve’s guidance was invaluable,” said Mr. Anderson. “He simplified the entire process and ensured we fulfilled our charitable goals while minimizing tax implications. It gave us peace of mind knowing everything was handled correctly.” The Andersons’ proactive approach with a CRT resulted in a smooth, efficient, and tax-advantaged foundation dissolution.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
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Feel free to ask Attorney Steve Bliss about: “What is a power of attorney and why do I need one?” Or “What if the estate doesn’t have enough money to pay all the debts?” or “Can retirement accounts be part of a living trust? and even: “How much does it cost to file for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.