September 5th, 2007
Owners give away property—and still make money
While securities, IRAs and fixed instrument investments continue to be the most common types of assets donated philanthropically to charitable remainder trusts, the amount of real estate donations has been increasing given that both commercial and residential property has experienced dramatic appreciation nationwide over the past few years.
Appreciation means higher capital gains taxes, a dent in value that most would rather avoid when cashing out of a property. Those looking to shrink their real estate holdings, rather than trade into another property using tax-free methods of transfer such as a 1031 exchange, have identified charitable remainder trusts as a way to divest themselves of real estate without paying the capital gains tax while also simultaneously donating to a charity.
Charitable remainder trusts allow an individual to donate an asset to a charity and then generate a fixed or variable rate annuity on the value of that donation. In the case of a real estate asset, the trust sells the property and invests the proceeds typically in a professionally managed mutual fund.
Just as 1031 exchanges permit an entity to pass the full value of a property’s sale into the purchase of another property of equal or greater value, a charitable remainder trust allows the full value of a property to be harnessed in the purchase of the mutual fund shares.
A charitable trust’s yield is not pegged to the performance of that mutual fund however. By IRS regulations, the size of the annuity is determined by the donor’s age at the time of the donation. A charitable trust by law must yield at least 5% but will produce returns above 10% if the donor is old enough and his/her life expectancy is consequently considered less. If the charitable remainder trust’s investment yields more than the payout, the charity keeps the difference but if it yields less, the money to bridge the difference is taken from the original donation so that the donor gets the full payout.
In this manner, tax lawyer, Neal Myerberg, of Myerberg, Shain Associates, who consults specifically with charitable organizations, foundations and philanthropists on charitable remainder trusts, considers trusts a conservative investment ideally suited for older individuals with a low risk tolerance who are in the preservation phase of their economic lives.
“I’ve set up these trusts for very unassuming, regular people,” Myerberg said. “You don’t have to be a millionaire for these donations to make economic sense. These are often a win/win situation for both the donor and the organization that donor is giving to.”
This strays slightly from the perception that only wealthy individuals have the means to engage in donating property to charity.
Speaking at a recent Investment & Tax planning breakfast hosted by American ORT–a non-profit international education and training organization that individuals can donate to using charitable remainder trusts–Myerberg presented an example of how a middle class individual, aged 70, donated a commercial property worth $300,000 and will reap a projected return of $283,000 spread over 16 years.
That number was calculated using the trust’s return minus the amount the commercial property is projected to yield over that same time period added to the tax savings activated by the donation. By Myerberg’s calculations, the donation was actually profitable for the donor because the property had been purchased for only $50K and a $300K sale price would incur a stiff capital gains tax.
Harry Estroff, Real Estate Gift Manager, and Martin Carovano, Associate Director of Gift Planning at the environmental conservation organization, The Nature Conservancy, estimate that there is between $200-$230 billion worth of total contributions annually to charitable remainder trusts or similarly structured donations.
Of that they estimate only $2 billion consists of real estate. But that number is growing.
“We do a lot more real estate girls than anything else,” Carovano said.
While charitable remainder trusts can potentially be profitable, Estroff and Carovano stated that those who typically donate do so because of a strong interest in philanthropy.
“The real key here is giving to charity, that’s what’s really driving the donations,” Estroff said.
“But it amazes me that it still isn’t just the province of the wealthy. There are many people of modest means doing this.”