One of the most common questions we have been asked by our clients during 2021 is what to do about unrealized gains. With rising stock markets and the explosive performance of some cryptocurrency assets, many people have investments that have significantly increased in value. However, whether the assets are held in a TD Ameritrade or a Coinbase account, the capital gains tax consequences inevitably factor into any decision to sell. The rate of taxation of the gains will depend on a number of factors, including how long you have held the asset. But is there a way to realize gains and defer the tax?
Definition Of CRT – Charitable Remainder Trust
Enter the charitable remainder trust (CRT). The CRT is a specialized irrevocable trust that has some very substantial tax advantages. If you were to transfer your highly appreciated cryptocurrency or stocks to the CRT and then sell the asset, you can then invest in other assets through the CRT without first having to pay tax on the gains. You will also be entitled to take an income tax deduction on your tax return, though not for the entire amount transferred to the CRT. Because the trust is irrevocable, the assets transferred to the CRT will also be outside of your estate and not subject to estate tax, if applicable. Importantly, you can take a fixed percentage of the assets in your CRT either for the rest of your life or for a fixed term of years.
At the end of your lifetime, or after the expiry of the set term of years, the assets remaining in the CRT would go to the charities that you chose when you established the trust. For those whose charitable intent is the primary motivator for creating the CRT, this will no doubt be an appealing prospect. For others, charitable giving is a secondary objective: most families want the bulk of their assets to go to their children after they have passed away.
There is a solution for this too: setting up a CRT to obtain the tax benefits and buying life insurance to replace the assets that will be lost to charity at the end of your lifetime. This enables you to tax efficiently donate to charity without your children receiving any less by way of inheritance. When purchasing life insurance it is often advisable for an irrevocable trust to hold that life insurance so that the proceeds will not be included in your estate and therefore potentially subject to estate tax.
There is still time to put these arrangements in place before the end of the year. We are happy to guide you through the options that may be right for you and your family.