Charitable Remainder Trusts (CRTs) are powerful estate planning tools, allowing individuals to donate assets, receive income for a term of years or for life, and ultimately benefit a charity of their choice. However, the complexities of tax law, specifically regarding Unrelated Business Income Tax (UBIT), require careful structuring to maximize benefits and minimize potential liabilities. A properly designed CRT can significantly reduce UBIT, but it demands a thorough understanding of IRS regulations and proactive planning with an experienced estate planning attorney like Steve Bliss.
What is UBIT and How Does it Impact CRTs?
UBIT applies to income generated by a tax-exempt organization – like a CRT – from a trade or business regularly carried on that is not substantially related to the organization’s exempt purpose. Essentially, if a CRT generates income that a typical charity wouldn’t, it’s subject to UBIT. This often occurs with rental income, active business ownership, or certain investment activities. For example, a CRT holding a rental property might generate taxable income if the property is actively managed, incurring expenses like repairs, advertising, and property management fees. According to the IRS, the current UBIT rate is a flat 21%, similar to the corporate income tax rate, and can significantly erode the income stream intended for the beneficiary. It’s crucial to analyze the potential UBIT implications *before* funding the trust, as minimizing it from the outset is far more efficient than trying to address it later.
How Can Asset Allocation Help Minimize UBIT?
Strategic asset allocation is a primary method for reducing UBIT within a CRT. Focusing on passive investments like broadly diversified stock and bond funds generally avoids UBIT, as these are considered investment income rather than income from an active trade or business. However, even within investments, careful consideration is needed. For instance, investing in a limited partnership that actively manages real estate could trigger UBIT. Diversification across asset classes is also vital. Steve Bliss often advises clients to consider a mix of low-yield, tax-exempt bonds, growth stocks, and real estate investment trusts (REITs), carefully weighing the potential UBIT implications of each. A well-crafted investment policy statement, aligned with the trust’s objectives and UBIT concerns, is essential. Approximately 60% of CRTs hold primarily publicly traded securities, which generally avoid UBIT issues, but the remaining 40% require closer scrutiny.
What Happened When a Client Didn’t Plan for UBIT?
Old Man Tiberius, a retired clockmaker, loved his rental properties. He decided to transfer them into a CRT, intending to receive income for life and then have the remaining assets go to the local historical society. He didn’t fully understand UBIT, assuming all income generated by the trust would be tax-free. Unfortunately, the properties required significant ongoing maintenance and management. The trust incurred expenses, and the IRS determined the rental activity constituted an unrelated trade or business. Suddenly, a substantial portion of the rental income was subject to UBIT, drastically reducing the income available to Old Man Tiberius. He felt betrayed by a system he believed would benefit both him and the historical society. He lamented, “I thought I was doing something good, but it ended up costing me dearly!” It took extensive legal maneuvering and a costly settlement to resolve the issue, highlighting the importance of proactive planning.
How Did Proper Planning Save the Day for the Henderson Family?
The Henderson family faced a similar situation but approached it differently. They owned a thriving family business – a local bakery – and wanted to transition ownership to a CRT with the intention of supporting culinary arts scholarships. Recognizing the potential UBIT issues, they consulted with Steve Bliss. He advised them to structure the CRT with a clear investment policy statement that prioritized passive investments. They also implemented a “safe harbor” strategy by engaging a professional management company to handle the day-to-day operations of the bakery, ensuring the CRT’s involvement was limited to receiving distributions. This approach allowed the CRT to benefit from the bakery’s success without triggering UBIT. “We were initially worried about the tax implications,” Mrs. Henderson admitted, “but Steve Bliss’s guidance gave us peace of mind. We’ve been able to support the culinary arts program for years, and it’s incredibly rewarding.” This story illustrates how proactive planning and expert advice can transform a potentially problematic situation into a resounding success.
“Careful planning with an experienced estate planning attorney is the most effective way to minimize UBIT and ensure your CRT achieves its intended goals.”
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
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Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/RdhPJGDcMru5uP7K7
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Address:
Wildomar Probate Law36330 Hidden Springs Rd Suite E, Wildomar, CA 92595
(951)412-2800/address>
Feel free to ask Attorney Steve Bliss about: “What happens to my social media and online accounts when I die?” Or “What happens if the will names multiple executors?” or “Can a living trust help provide for a loved one with special needs? and even: “Can I keep my car if I file for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.