CARES Act Charity Tax Break Creates a Trust Planning Opportunity, but Act Fast

A CRUT allows high-income clients to make a big donation without relinquishing all income-generating potential of the assets.

To encourage charitable giving during the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act made several important changes to the rules governing the federal deduction for charitable contributions.

More specifically, the CARES Act suspended the rule that generally limits the deduction for cash donations to 60% of the taxpayer’s adjusted gross income (AGI) for 2020 and 2021. This presents an opportunity for charitably inclined clients to maximize their charitable contributions deduction by taking action before year-end. 

Clients looking to maximize the tax benefits of charitable giving may be particularly interested in the charitable remainder unitrust (CRUT) structure. But they should be advised that only a few short months remain to take advantage of the valuable CARES Act charitable giving tax breaks.

Background: CARES Act Changes for 2020-2021

Taxpayers are normally permitted to deduct cash contributions to charity only to the extent that the donation does not exceed 60% of AGI. Gifts of appreciated long-term capital gain property are generally subject to lower 20% or 30% AGI limits, depending on the type of charity. As noted, the CARES Act lifted the 60% AGI limit for 2020 and this benefit was later extended through 2021. 

Cash contributions to most charities are, therefore, not subject to any type of AGI limit (although some donor-advised funds and supporting organizations are excluded from the expanded gift limit). Individual taxpayers can offset their income for 2020 and 2021 up to 100% of their AGI. 

Charitable contributions that exceed AGI in 2020 or 2021 can be carried over to offset income in a later year (the amounts are not refundable, however). Amounts can be carried forward for five years, but those amounts will, under current law, again become subject to the 60% AGI limitation when carried over into 2022 or a later year.

Value of the CRUT Structure

Because charitable deductions are not limited by AGI in 2021, high-income clients may wish to consider acting quickly to maximize their federal tax deduction before the AGI limit is reinstated in 2022. But those clients may also be reluctant to relinquish all benefits and income-generating potential associated with a larger-than-average donation.

The CRUT is an irrevocable structure that provides income to the client each year, either for life or over a predetermined term of years. The amount of income is a fixed percentage (of at least 5%) based on the value of the assets in the CRUT (the amount is redetermined each year). At the end of the term (which may be the donor’s lifetime), the remaining value is paid to a charity or donor-advised fund.

Typically, assets such as cash or securities are used to fund a CRUT. After the CRUT is initially funded, the client can elect to contribute additional assets over the CRUT term.

Importantly, the CRUT does not pay capital gains taxes when the assets are sold (so that the entire value of the asset remains within the CRUT). The donor (or income beneficiary) does pay income taxes on distributions from the CRUT.

Currently, one of the most valuable benefits of the CRUT Is that the donor receives a federal income tax deduction equal to the transferred assets in the year that the CRUT is funded. If the donor funds the CRUT with cash, the amount is 100% deductible under the CARES Act rule for 2021. That’s true even though the donor will continue to receive income from the CRUT each year. 

Conclusion

It’s far from certain whether the valuable CARES Act tax breaks for charitable giving will be extended into 2022. Clients who want to maximize the tax value of their charitable dollars should be advised of these and other valuable charitable giving options before 2021 is over.

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