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BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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Thank you for your answer. I do have a good cpa in retrospect.

Resolved Question:

Thank you for your answer. I do have a good cpa in retrospect. Can I sell or transfer the bonds into a fixed annuity? Sorry for the delay in time, but it was late and I had to go to bed. I went for advice to a reputable financial planner. If I "unwind" the Charitable Remainder Unitrust, how much tax would I have to pay since I put half the money into like property. Would I pay tax only on the 200K I put into the Unitrust? I received 430K to begin with. How much would I be paying in taxes? I didn't understand the Unitrust and want the money to go to my children when I'm gone, not a charity.
Submitted: 7 years ago.
Category: Tax
Expert:  BK-CPA replied 7 years ago.

This is a very tricky situation. Let's start with the definition of a charitable remainder trust for posterity and work from there (bolding mine):


charitable remainder trust


An arrangement in which property or money is donated to a charity, but the donor (called the grantor) continues to use the property and/or receive income from it while living. The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned. In addition, the asset is removed from the estate, reducing subsequent estate taxes. While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it's still a qualified charitable organization). CRTs come in three types: charitable remainder annuity trust (which pays a fixed dollar amount annually), a charitable remainder unitrust (which pays a fixed percentage of the trust's value annually), and a charitable pooled income fund (which is set up by the charity, enabling many donors to contribute).







Trying to undo a charitable remainder trust, if the contribution were to actually be revocable (see above), would involve amending prior year returns, owing taxes, interest, and penalties, and would otherwise be a nightmare from a forms preparation standpoint. You would have to go back to the year of creation for the trust and undo any charitable deduction, recognize gains on appreciated assets transferred to the trust in its initial year and sold, plus the trust earnings, and all despite these investments later decline in value (your losses wouldn't show up until your later years' returns, as though you personally owned everything all along).


Within the trust, you can manage the investments, yes (so going with a fixed annuity or bonds is up to you, and again, see above).


I would like to suggest that there are legal ramifications for which you need to consult an attorney. You can try this JustAnswers forum, but I of course recommend you turn to your own personal (local) legal, investment, and tax counsel for advice regarding your specific situation (ie, from people who can review trust documents, tax returns, investment options, etc.).


I believe you said that you put $200K in the trust and the rest to real estate (not sure if the real estate was in trust too). You would have an inherited basis in assets received from the estate that would be the starting point of your tax calculation. From there, the remainder interest of the amount you put in trust would amount to a charitable contribution (based on actuarial tables among other things), and the income from the trust that flows through to you each year thereafter (the character of which is defined via the historical earnings of the trust, namely, ordinary income/capital gains/etc.) would have been recognized.


You probably have life insurance as a hedge against your potential early death (in which the trust assets go to charity), noting that your life insurance proceeds generally won't be subject to estate/income tax, thus creating a so-called "tax free" inheritance for your grandchildren. Aside from you having to pay the ultimate price (I don't suggest death), you need the income to live on most likely and the money may need to go to you instead of your (grand)children. For this purpose, I believe your CPA looked to tie your assets up in charity (ie, you can't touch all / some of the principal having been donated to charity, get a tax deduction and all the income to sustain you for retirement purposes so you don't spend it all so to speak, and your life insurance beneficiaries are taken care of in the event of your early and untimely death... not too bad an idea up front perhaps again, that trust... again, sorry about the investment performance).


Thank you for your question.

Edited by BK-CPA on 9/2/2010 at 4:04 PM EST
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