Houston Estate Planning and Elder Law Attorney Blog
You love giving back to Houston and hold significant real-estate equity. Selling property triggers hefty capital-gains tax, but funding a charitable remainder trust (CRT) turns that hidden value into lifetime income and future philanthropy. When structured correctly, a CRT slashes taxes, boosts cash flow, and leaves a legacy in the Bayou City.
CRT Basics in Plain English
A CRT is an irrevocable trust that pays you, or another non-charitable beneficiary, income for life or up to twenty years. At term’s end, the remaining assets go to one or more charities. Because the remainder benefits charity, the IRS grants an immediate income-tax deduction and exempts the trust from capital-gains tax on property sales.
Selecting the Right Houston Property
Appreciated rental buildings and undeveloped land make ideal CRT contributions. Homesteads do not qualify for capital-gains exclusion inside the trust, so focus on investment real estate. Obtain a recent appraisal and verify no environmental issues exist, because cleanup liabilities follow the trust and reduce the charitable deduction.
Calculating the Tax Deduction
The deduction equals the present value of the charitable remainder, determined by IRS Section 7520 rates, payout percentage, and term length. Lower payouts or longer terms increase the deduction but reduce annual income. Work with a planner to strike the balance between tax savings and cash flow.
Setting the Payout Structure
Choose between an annuity trust, which pays a fixed dollar amount, or a unitrust, which pays a percentage of trust assets revalued annually. Annuities provide stable income, while unitrusts hedge inflation as property values rise. Many Houstonians prefer a unitrust to capture potential appreciation in the booming real-estate market.
Selling Property Inside the CRT
Once the deed transfers, the trustee—often a corporate fiduciary—sells the property tax-free. The trust reinvests proceeds in diversified portfolios, MLPs, or even more real estate. Spreading risk reduces dependence on one asset and stabilizes payouts. Because gains stay untaxed inside the trust, more principal remains to generate income.
Naming Your Favorite Houston Charities
Designate local museums, universities, or food banks as remainder beneficiaries. You may split percentages among several organizations. Some donors create a donor-advised fund as the remainder beneficiary, allowing heirs to recommend grants later. Whatever you choose, clarify mission alignment so your gift matches your values decades from now.
Combining a Wealth-Replacement Trust
Because CRT assets ultimately leave your family, many donors purchase life insurance in an irrevocable life-insurance trust (ILIT) to replace their children’s inheritance. The CRT’s tax savings and extra cash flow often cover new premium costs. Your heirs receive policy proceeds outside your taxable estate, while charities receive the CRT remainder—a win-win solution.
Filing Requirements and Ongoing Duties
The trustee files annual Form 5227 and issues Schedule K-1s for income recipients. Keep copies of the initial trust document, appraisal, and Form 8283 for IRS compliance. Regular reviews ensure payout percentages remain within IRS minimums and that investments meet income goals.
Transform appreciated real estate into a lifetime income stream and a lasting charitable legacy. Call McCulloch & Miller, PLLC at (713) 903-7879 to build your Houston charitable-remainder strategy today.