Let’s assume you paid $100K for ABC Biotech stock in 2002.
Today it’s worth $1M.
Gain = $900K.
In 2022, you transfer $1M ABC Biotech stock to a Charitable Remainder Trust (CRT).
After transferring it to the CRT, you sell the stock and pay no tax on the $900K gain.
Tax avoided by selling the stock in the CRT = ~$330K (at highest Fed/CA tax rate).
Tax saved (on your 2022 tax return) by transferring $1M ABC Biotech stock to the CRT = ~$200K*
Cash balance in the CRT from the stock sale = $1M
In the CRT (let’s say it’s set up at Schwab), you invest the $1M cash in a diversified portfolio of stocks/bonds/index funds/etc.
Assume this grows at 6% on average per year.
As required by the CRT, you pay yourself 5%, every year, of the $1M transferred to the CRT.
Payment to you: 5% x $1M = $50K per year.
Growth on CRT portfolio: 6% x $1M = $60K on average per year.
Balance in CRT at end of 20 years: ~$1.2M. Makes sense – you earned ~$10K more than you took out of the CRT every year for 20 years:
NOTE: $10K excess earned per year x 20 years = $200K excess earnings. Add this to your $1M CRT starting value = $1.2M ending value.
At the end of 20 years, the $1.2M balance remaining in the trust is distributed to the charities you named as beneficiaries of your Charitable Remainder Trust, e.g. the charities receive what remains in the trust. Thus, the name.
I used 20 years for simplicity, but the trust length is up to you. Often, it’s until death. This allows you to take an income stream over your lifetime from the CRT, then leave the balance to charity at your passing.
Keep in mind, with any financial strategy, there are always nuances/trade-offs to consider based on your unique preferences, goals, tax status, and comfort level, so by no means is this advice.
*This figure changes based on interest rates. The higher the interest rate, the greater the current year tax deduction. As interest rates rise, Charitable Trusts could get a boost.
Biotech Wealth Services | Wealth Management | HoyleCohen
Disclaimer: For information purposes only and should not be interpreted as legal, tax or financial advice. Always consult your CPA/tax advisor/attorney (or reach out to us;) to discuss your specific situation. Past performance is no guarantee of future results.
