Charitable Remainder Trusts (CRT) Example

Mr. and Mrs. Cahill, both 70, have mutual fund shares worth $100,000. They purchased these shares many years ago for $20,000. The dividend yield on this fund is 1%. They would like more money to spend during their retirement but are hesitant to sell their shares and reinvest for a higher yield due to the capital gains tax they would pay.

They contribute the shares to a trust and select a 6% payout rate. Their distributions immediately increase from $1,000 to $6,000 per year and will grow over time if the shares in the trust appreciate in value.

Their gift results in a charitable deduction of $35,775 that, in their 30% tax bracket, translates into a net tax savings of $10,773. In addition they avoid a capital gains tax of $16,000 (20% of $80,000). Thus, the total tax savings amounts to $26,773, reducing the net cost of the gift to $73,267. Based on net cost, the $6,000 they receive is equivalent to an 8.2% yield.