On the charitable trust exemption for investor

[mrmage]

This post is in response to this post on a trust described here.

The linked article's advice was to create a charitable trust, offload appreciated shares to it, the self said shares, and hand the money back to yourself in annual distributions.

Seems to me that the motivations of this action and intentions of the originator are to avoid payment of appropriate capital gains tax. Can you tell me another possible motivation or intention?

First, thanks for being civil. That helps me understand how others see things, even if we don’t ultimately agree. That said...

Of course paying less taxes is the goal, but that doesn’t reveal what the person intends to do with the savings or their justifications. Also, choosing one particular exemption as bad while ignoring the rest strikes me as cherry picking.

For example, my taxes this year on TSLA investments will be mostly ordinary income, because I’ve traded short term options. Being in California means I’ll also pay nearly 10% more in taxes than you.

Why is it fair for me to pay 50% and for others to pay 23% on investment gains? As far as I can tell, it’s our government that says it’s fair. These are their rules that everyone agrees on.

If a 2x+ tax difference is fair because the government says so, using deductions offered by the government to reduce the tax burden on profits should be fair too. Same rules.

As for intent, what if someone is just trying to reduce overall taxes to 40%, the same amount you’d pay? Or to 23%, the amount you’d pay with long term capital gains? Or donate more to charities because they feel the government is awful at using capital? Or pay for someone’s medical care?

There are lots of good uses for capital besides paying taxes, that are not completely self serving.

 

[TheTalkingMule]

Kudos for starting a thread rather than continuing a tangent topic in the "main thread". A sign of next level civility and sophistication for sure.

Can't say I would ever be an active investor in California with the taxation people are citing throughout this forum, I'm sure it's frustrating. That being said, you don't need to live there. You can also simply invest longer term as investment was intended and pay far less in tax. CA is misguided, obviously, but that doesn't mean we should be skirting other tax payments to offset their absurdity.

A halfway decent person shouldn't be willing to create a charitable trust simply for the purpose of then filtering "donations" back to themselves to avoid paying federal taxes on a greatly appreciated short-term investment. Tons of people do it, some professionally on behalf of others, but it's still a garbage thing to do. Semi-legal or not. Even the author in the link provided clearly indicated that you're supposed to just pretend that 10% of this capital was used as part of the charity. Wink wink.

It's back to school season and my girlfriend is a pre-K teacher in about the worst part of West Philly, hence my general shortness with the investor class. Poverty is so completely out of control that when I hear other posters(NOT you) saying things like "poor people need to get an education", I tend to loose my *sugar*. Stories of new 3 and 4 year old students who mothers and fathers were shot in the face and killed over the summer or died of COVID at 32 are fresh in my mind. Grandma's with literally not a piece of furniture in their house raising 5 or 6 kids from various family members who've fallen through the cracks. It boils over at times.

Just pay your taxes on your Tesla millions please.

 

[mrmage]

I understand the predicament, in part because I know many who experienced similar poverty.

I have a mix of short term and long term, but the short term is due now. I do need to live here, because of the business. For years it would have been financially better to move, but worse for everyone else who works there. We all have responsibilities.

Not everyone is trying for the 10% minimum in those trusts, much less skirting the 10%. Just because some people abuse it doesn’t mean everyone does. I may be an optimist, but I believe that for many, it provides a way to give more and more safely.

In any case I appreciate your sharing. Rest assured that I pay plenty of taxes on my profits. The government is very good about that.

 

[dakh]

Late to the thread.. From the moral perspective, at least to me if you're selling an asset simply because you want to rebalance your portfolio and invest into something else, taxing that transaction, especially at regular income rates, is very much random. If I don't sell and just keep the asset, the government gets nothing. So it just creates extra barrier to my ability to reallocate assets. Similar situation with real estate is actually handled differently -- [I'm oversimplifying here] if you're selling your house and buying another one instead, you're not paying taxes on appreciation of your house.

Now if you sold an asset and simply spent the money, that's a different conversation, I am still not quite convinced how is that regular income if you're not a full time trader, but Ok, close enough.

On the original topic, I might see about using this later -- for the actual donation purposes. I can donate my TSLA now (which unfortunately probably won't trigger company match), but if I wanted to have a portfolio that I manage, and grow it to donate later, this becomes prohibitive due to taxation. This CRT thing looks like will enable this scenario. So thank you for bringing this up here!

 

[mrmage]

Late to the thread.. From the moral perspective, at least to me if you're selling an asset simply because you want to rebalance your portfolio and invest into something else, taxing that transaction, especially at regular income rates, is very much random. If I don't sell and just keep the asset, the government gets nothing. So it just creates extra barrier to my ability to reallocate assets. Similar situation with real estate is actually handled differently -- [I'm oversimplifying here] if you're selling your house and buying another one instead, you're not paying taxes on appreciation of your house.

Now if you sold an asset and simply spent the money, that's a different conversation, I am still not quite convinced how is that regular income if you're not a full time trader, but Ok, close enough.

On the original topic, I might see about using this later -- for the actual donation purposes. I can donate my TSLA now (which unfortunately probably won't trigger company match), but if I wanted to have a portfolio that I manage, and grow it to donate later, this becomes prohibitive due to taxation. This CRT thing looks like will enable this scenario. So thank you for bringing this up here!

Yes, this was my conclusion as well. Overall, it seems like a CRT is a win-win-win for the government, investor, and designated charity.

For the benefit of others who may not be familiar with CRTs, here's a summary of what I found this past week. The information should be mostly right, but confirm everything with a financial professional. These things are complicated.

There are many kinds of CRTs, but the NIMCRUT (Net Income with Makeup Charitable Remainder Unitrust) is particularly interesting.

NIMCRUTs (and CRUTs) are similar to IRAs, except the person can contribute any amount of appreciated assets as well as cash. Although most on this forum would contribute TSLA stock, NIMCRUTs can accept other assets like real estate. Additional contributions to a NIMCRUT are allowed at later times.

Also like an IRA, assets in a NIMCRUT can be reinvested without being taxed. The recipient is taxed when the NIMCRUT distributes income, just like an IRA. Income from the NIMCRUT is paid to the individual and taxed the usual way - long term capital gains, short term, tax bracket, etc depending on how the CRUT generated the income.

CRUTs and NIMCRUTs also have specific requirements.

1. The term of the NIMCRUT is typically for life, but can be 20 years instead. Life can be for yourself or a couple.
2. At least 10% of the initial contribution must be donated to charity when the CRUT ends (you choose the %)
3. You receive a write off today for the donated portion.
4. If possible, a fixed percentage is distributed from the CRUT each year (you choose the % up to 50%)
5. If the NIMCRUT doesn't have enough income to cover the fixed percentage, it pays just the income generated.
6. If less income is paid than the minimum percentage, the NIMCRUT owes the recipient the difference that is paid later. This is the "Makeup" portion of NIMCRUT
7. If there is > 5% chance that there will not be enough funds left to charity, bad things will happen. Don't let this happen.

Provisions 5 and 6 are the Net Income portion of the NIMCRUT, which seems more flexible. With just a CRUT, a fixed percentage must be distributed annually. With a NIMCRUT, the percentage is superseded if the NIMCRUT doesn't generate enough income. This ensures that the trust will meet its obligations even when a larger fixed percentage is selected for distributions.

The trust must be set up carefully with a financial professional because they're complicated with many options. Items that jumped out include provisions to include capital gains as income, change the charity, and ensure at least 10% of the original is left.

There are also variations like the Flip-CRUT, which starts as NIMCRUT, but converts to CRUT based on certain events.

Why is this a win-win-win for everyone?

- Investor - Can reinvest appreciated assets like TSLA stock without being taxed immediately
- Charity - Receives a substantial donation at the end of the term
- Government - Receives taxes immediately from NIMCRUT income that would normally be deferred indefinitely to avoid taxes from selling the appreciated asset. Also receives more taxes by letting the trustee reinvest and grow the assets (and distributed income).

What are the disadvantages?

- You cannot take arbitrary funds from the CRUT or borrow from it, because it must adhere to the rules.
- Third party administration fees are in the range of $1-6k depending on trust size.

If someone is charitably minded, CRUTs seem to be a good way to donate and receive potentially growing income stream to take care of present needs. An IRA or 401k is better due to its flexibility, but has limits on contributions.

I'll update this thread with more information after talking to some tax / financial professionals. Some questions I'd like answered:

- Can the trustee (me) of the NIMCRUT invest in derivatives (covered calls, spreads, puts, etc)?
- Verify and details

 

[Zaxxon]

Bump. Have any of you gone through and completed the setup of a charitable remainder trust yet? With the continued rise of TSLA, it seems there may be more folks becoming interested...

Myself, I have sold a few covered calls that will likely be exercised next month. I'm considering how these proceeds will be handled. I think I've put myself in a bind with these particular shares by having sold calls against them, as that seems to be an impenetrable barrier preventing me from directly donating them, as my research indicates that most charities aren't equipped to receive a covered call position (only direct ordinary stock positions). If anyone has dealt with this successfully, I'd appreciate hearing how.

AFAICT, the straightforward option is to let the calls be exercised, pay cap gains taxes, make a cash donation, and deduct that donation. The less straightforward option is to set up a CRT and transfer the position there, then donate via the CRT.

Yes, I'm consulting with my CPA, but figured it was worth reaching out here, too.

Congrats to all who've held on to TSLA from the early days!

 

[ggr]

Bump. Have any of you gone through and completed the setup of a charitable remainder trust yet? With the continued rise of TSLA, it seems there may be more folks becoming interested...

Myself, I have sold a few covered calls that will likely be exercised next month. I'm considering how these proceeds will be handled. I think I've put myself in a bind with these particular shares by having sold calls against them, as that seems to be an impenetrable barrier preventing me from directly donating them, as my research indicates that most charities aren't equipped to receive a covered call position (only direct ordinary stock positions). If anyone has dealt with this successfully, I'd appreciate hearing how.

AFAICT, the straightforward option is to let the calls be exercised, pay cap gains taxes, make a cash donation, and deduct that donation. The less straightforward option is to set up a CRT and transfer the position there, then donate via the CRT.

Yes, I'm consulting with my CPA, but figured it was worth reaching out here, too.

Congrats to all who've held on to TSLA from the early days!

I am moving some of my deeper calls into a CRUT soon, but the paperwork is held up.

You're right, as far as I know only actual stock can be donated, not any form of options. If I understand correctly, you could move the options into the CRT, sell them, and donate the proceeds, and you wouldn't pay any tax on that. But my understanding is as a lay person, not qualified, so don't trust it.

 

[Zaxxon]

I am moving some of my deeper calls into a CRUT soon, but the paperwork is held up.

You're right, as far as I know only actual stock can be donated, not any form of options. If I understand correctly, you could move the options into the CRT, sell them, and donate the proceeds, and you wouldn't pay any tax on that. But my understanding is as a lay person, not qualified, so don't trust it.

Thanks. That's my understanding, as well. So I guess it's now doubly untrustworthy...

 

[mrmage]

I've continued looking into this, especially wrt FlipCRUTs. These start as a NIMCRUT (disbursement up to a specified rate based on income), and convert to a CRUT (disbursement at a specified rate based on assets). The conversion between NIMCRUT and CRUT requires a triggering event. There's lots of information about FlipCRUTs out there, so I won't repeat that unless someone asks.

I'll address some points wrt FlipCRUTs that aren't often covered. These are based on my discussions with multiple lawyers, but it might be wrong. This isn't legal advice.

1. The FlipCRUT can be set up to give the trustee fairly broad discretion for what "income" means. For example, during the NIMCRUT phase, the trustee can treat capital gains as appreciation of the principal (gains are not distributed but grow the principal), but if circumstances change, the trustee can treat capital gains as income (disbursed to beneficiaries up to the rate).

2. The trigger event (conversion from NIMCRUT to CRUT can vary depending on the lawyer you use. One law firm did not feel comfortable using sale of a vacation home as a trigger for the conversion event. Another felt fine with this. One firm didn't even feel comfortable using a specific year for the conversion event, even though the IRS specifically stated that was allowed.

3. Finding someone with deep expertise on CRUTs has been challenging. There's lots who will do CRUTs, but not many know that trustees can have the discretion to determine what is considered income vs appreciation.