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Improve your Income and Tax Planning with Charitable Trusts


As a practicing estate planning attorney for over 33 years, I have noticed a huge change in a client’s mentality when it comes to estate planning and retirement planning.  It used to be that most clients were concerned about having enough to leave a legacy to their children upon their death.  Now, it seems that the biggest concerns my clients have are the fear of running out money or outliving their retirement.  They are much more concerned about developing a stream of retirement income than they are in leaving a legacy to the kids.  

Second, I have noticed an infatuation with IRAs.  We have seen most employers withdraw from employer-sponsored retirement plans or pension plans.  We have also witnessed continued attacks to raid the Social Security funds.  All these events put pressure and stress on the couple that is trying to prepare and plan for their retirement. It seems to them that their only hope is to build their IRAs with very restrictive rules on how much can be contributed each year.  For those couples already in their 60s, perhaps it is too late to build that IRA.  

The purpose of this article is to convince the reader that perhaps there are better tax strategies to prepare for retirement then the traditional IRA or Annuity.  Let’s explore the use of a Charitable Remainder Trust to provide a tax-efficient steady stream of income to a client and/or his spouse for their retirement years. In fact, for their lifetime.   Let’s take a strategy that was more commonly thought of as a charitable giving strategy and rethink its use and mold it into a highly efficient income tax retirement strategy.    And let’s compare this strategy with other income tax deferral strategies. In the end, you will find that if you are willing to have a very small fraction of the initial funding of the CRA pass to charity on your deaths,  then you will achieve significant income tax benefits during life.  


  1. Like the IRA, the assets inside of the CRA are reinvested without paying income tax on the interest and dividends earned.  This is the most powerful feature of an IRA as well as a CRA.  Finance 101 teaches us that money will grow exponentially faster in a tax-deferred environment versus a taxable environment.  Neither an IRA or a CRA pays any income taxes on trust assets.   
  2. Like an IRA, if the asset that is contributed to the IRA or CRA has built-in capital gains,  no capital gains tax is recognized on the contribution of that asset.  
  3. Furthermore, like an IRA, when an appreciated asset is sold within the IRA or CRA, no income taxes or capital gains taxes will be paid at the time of the sell.   
  4. Income tax is deferred and only paid when distributions finally come out of the IRA or the CRA when hopefully you are in a lower income tax bracket than you were while you were working.  
  5. Both the IRA and the CRA allow for you to spread the distributions over your lifetime thus paying only income tax on the relatively small amount of the distribution and maintaining income tax deferral on the build-up inside of the IRA or the CRA.  


  1. IRAs are very limited in the amount that can be contributed each year. As stated earlier, if you are already in your 60s and trying to fund an IRA, there just isn’t enough time.  With a CRA there is no limit.  You could fund it all at once with a variety of assets such as an apartment complex or a building, etc.  
  2. With an IRA, you can generally only contribute cash or perhaps stocks and bonds.  With a CRA you can contribute any appreciable asset like real estate, limited partnership interests, etc.  
  3. You cannot be the custodian of your own IRA.  You can be your own Trustee of your own CRA and manage the assets within the realm of fiduciary duty.   
  4. Investments that you can choose inside of an IRA are very restrictive either as a result of the law or as a result of the custodian being a financial institution.   Investments inside of a CRA are subject to the rules of the charitable trust, not the IRA rules and are much more flexible.  Furthermore, because you are the Trustee and not a financial institution, you have the ability to invest in broader assets.   
  5. Distributions out of the IRA are controlled by very confusing and restrictive “minimum distribution rules”.  Rules that force at least certain minimum amounts to be distributed each year.  These distributions generally start out at about 4% of the value of the trust at age 70 ½. But, each year the amount required to be distributed increases proportionately as your life expectancy decreases with the idea that it will be fully distributed at age 100. 
    1. There is much more flexibility to alter the timing and the year of distributions from a CRA.  Some years distributions can be withheld.  The amount withheld can be “made up” in later years when the trust has more assets and you are in a smaller income tax bracket.  You have a “faucet” where income can be turned on and turned off. 
    2. IRAs have severe penalties on early distributions prior to age 59.5.  CRAs don’t.  Under a CRA distribution can start immediately upon funding, regardless of your age.   
    3. Distributions from an IRA are generally taxed 100% as ordinary income. Distributions from a CRA can take advantage of the 4-tier distribution system.  A portion of the distribution is ordinary income, a portion is capital gain, a portion may be tax-exempt income and a portion may be a return of principal.  Much more favorable than an IRA. 
    4. Distributions from an IRA change when the participant dies depending on elections and ages of the remainder beneficiaries.   With a CRA, distributions will remain unchanged as it passes to a surviving spouse.  
    5. Distributions from an IRA must begin by the time the participant turns 70 ½.  Distributions from a CRA can be deferred until the participant “turns on the faucet”.  The deferrals can be increased much longer under a CRA.  


  1. Contributions to an IRA may be 100% tax-deductible.  However, remember that most high net worth clients lose most of their income tax deductions to an IRA if they are able to contribute anything at all.  Also, remember that only very limited amounts can be contributed each year.  
    1. With a CRA only approximately 10% of what is contributed to a CRA is income tax-deductible (the present value of the remainder interest that will ultimately pass to charity).  But, remember, with a CRA there are no limits on the amount that can be contributed.
    2. Also, remember that you avoid all capital gains taxes on built-in capital gains on contributing highly appreciated assets to a CRA.  Avoiding that capital gain is tantamount to an income tax deduction on that capital gain.
    3. Using a CRA is one of the only few times a taxpayer gets an immediate income tax deduction upfront even though nothing passes to charity until after the death of the client.   
  2. At your death, 100% of the remaining balance of your IRA passes beneficiaries you have designated.  At your death, whatever is leftover in the CRA passes to charity.  
    1. But, keep in mind, if either you or your wife live normal life expectancy, you will have pulled out over 90% of the CRA during your lifetime leaving only 10% that will pass to charity. 
    2. Most clients are willing to leave approximately 10% of their estate to charity anyway, regardless of tax benefits.  
    3. If clients are worried about the loss of an inheritance to their children, they can purchase a life insurance policy, 2nd to die policy, paid for by the income tax benefits of the CRA as described above.
  3. Most clients are willing to “donate” this 10% remainder interest to charity in exchange for providing a much higher and more tax-efficient stream of payments used to enhance their lives during retirement.  In other words, the clients themselves are much better off in retirement, at the expense of reducing their children’s inheritance by 10%.   
  4. The risk in an IRA is not having enough time to properly fund it and consequently outliving your retirement income.  The risk with a CRA is dying early and having a larger amount pass to charity instead of your children.  Most clients prefer the risk of a CRA to the pressure of outliving their retirement income.     


Most clients who have bought and sold real estate understand the value of an Installment Sale.  Spreading the taxable gain over the years in which payments are received from the Installment Note.    IRS allows the taxation of the gain on that property to be deferred as the payments are received instead of upfront when the property is sold.  The IRS is very restrictive on what kinds of assets qualify for Installment Note treatment.  Certainly, the sale of a stock portfolio through the stock market would never qualify for installment treatment because the entire amount of gain is recognized when the transaction closes and cash changes hands. 

However, a client who contributes the same stock portfolio to a CRA can effectively get installment sale treatment.  As noted above, the CRA can sell the entire portfolio with no income tax consequences to the client and no “haircut”.  So, a $1 million portfolio sold will leave $1 million in cash to be reinvested.  Now, the built-in capital gain will go into the 2nd tier of the 4-tier distribution system under the CRA. Such that when distributions come out to the client, most of those distributions will come out as capital gain until that bucket is emptied.  Because the capital gain on that portfolio is now spread over the years of distributions to the client, the client essentially ends up with Installment Sale treatment on the portfolio. 


1031 exchanges defer the gain on the sale of real estate by substituting property of like kind.  Meaning real estate is traded for real estate.  But, with each exchange, there is no increase in cost basis so there is no increase in depreciation.   Historically, 1031 exchanges have been more popular with bare ground rather than income-producing properties (probably for the reason that there is no cost basis step-up, meaning there is no additional depreciation).  Typical 1031 exchange is bare ground for bare ground.  No income-producing assets.  And if the exchange is for an income-producing property like an apartment building for another apartment building, because of no step-up in basis, and no increase in depreciation, all of the income is ordinary income with virtually no deductions.  

Clients who want to diversify from bare ground non-income producing property to an income portfolio as they approach retirement are not allowed to use 1031.   

Compare that to a CRA.  Client contributes the entire apartment complex to the CRA.  CRA sells the complex and converts into stocks and bonds.  This transaction would not qualify under 1031. 

    1. The client still achieves deferral in that there is no “haircut” on the sale.  The CRA pays no income taxes whatsoever.
    2. 1031 creates a deferral until the exchanged property is subsequently sold without a 1031 exchange.   CRA creates a deferral where the capital gains are part of the 4-tier system and are paid out over time through the distributions. 
    3. 1031 the client still pays the income tax on the income generated while the property is owned, prior to the sale. (rent from the building) CRA the client achieves 100% deferral on the income generated from the income inside of the CRA.  That income is added to the 4-tier system and paid out over the lifetime of the client.  


Client is much better off going into retirement with the most income tax-efficient strategy available to them.  

Charity is happy to be getting the remainder interest.   Client is able to leave a legacy.  

Children could be better off if the client purchases a life insurance policy for them to inherit which is free of income tax and estate tax.  

Your tax dollars are better off.  Instead of giving your tax dollars to the IRS, they are passing to a charity of your choice.


Matt Dana

The Dana name has become the symbol of a quality Estate Plan in Arizona. It has taken over 34 years to develop and continues to strive for excellence in the Estate Planning community. At its core is Estate Planning lawyer Matt Dana. [Learn more about Matt]

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