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  • Noelle Merwin
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Beyond the Gift: The Tax and Income Benefits of a Charitable Remainder Trust
Beyond the Gift: The Tax and Income Benefits of a Charitable Remainder Trust 266 266 Noelle Merwin

If you’re thinking about making a large gift to charity before year end, options besides an outright gift of cash are worth considering. One alternative is a charitable remainder trust (CRT). Funding one this year will provide a 2026 income tax deduction and other tax and nontax benefits. It may be particularly beneficial if you’d like to tax-efficiently divest a concentrated stock position and create an income stream for yourself.

How a CRT works

A CRT is an irrevocable trust to which you contribute cash, stock or other assets. If you name yourself as the income beneficiary, the trust pays you income for life or a term of up to 20 years. At the end of the term, it distributes the remaining assets to one or more charities you’ve chosen. (You can instead name someone else as the income beneficiary, but the tax consequences will differ somewhat from what’s discussed here.)

When you fund the trust, you qualify for an itemized charitable income tax deduction (subject to applicable limits) equal to the present value of the charitable beneficiaries’ remainder interest. But be aware that, beginning in 2026, charitable contributions generally are deductible only to the extent they exceed 0.5% of your adjusted gross income.

There are two types of CRTs, each with its own pros and cons:

1. Charitable remainder annuity trust (CRAT). A CRAT pays a fixed dollar amount, generally determined as a percentage of the trust’s initial value, and doesn’t allow additional contributions once it’s funded.

2. Charitable remainder unitrust (CRUT). A CRUT pays out a fixed percentage of the trust’s value recalculated annually and may allow additional contributions, depending on its terms.

CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. CRUTs, on the other hand, allow payouts to increase as the trust’s value increases. And, as noted, CRUTs may permit additional contributions. One potential disadvantage of a CRUT is that payouts shrink if the trust’s value declines.

To ensure that a CRT is a legitimate charitable giving vehicle, IRS guidelines require the present value of the charitable remainder interest to be at least 10% of the trust assets’ value at the time they’re contributed. The computation of the present value is affected by several factors, including the length of the trust term (or your age if payouts are made for life), the size of annual payouts and an IRS-prescribed Section 7520 rate.

Diversifying your portfolio

A CRT can help you reduce single-stock exposure and defer taxes if you own highly appreciated shares that would generate a large capital gain if sold. Because a CRT is generally exempt from income tax, it can sell shares transferred to it without paying tax on the gain. The CRT can then invest the proceeds in a variety of stocks and bonds, which helps diversify your overall investment position because of your income interest in the trust. You can also invest the payments you receive in other securities to further diversify.

As the income beneficiary, you’ll generally owe some capital gains tax when you receive the payments. But the payments will be spread over time, so much of the liability may be deferred. Plus, a portion of each payment may be considered tax-free return of principal. This can help reduce or avoid your exposure to the top 20% long-term capital gains tax rate or the 3.8% net investment income tax.

Be aware that CRT distributions follow tax-ordering rules and may be taxed as capital gain or other income before being treated as a return of principal. The specific results will depend on a variety of factors.

Is a CRT a fit?

A CRT may be a good fit for you if you can contribute appreciated assets and would like to receive payments over time. But the trust is irrevocable and comes with complex tax rules. We can estimate your potential deduction and assess the overall income tax impact before you decide whether to set up a CRT and make a year-end contribution. Contact your Smolin representative.

  • Noelle Merwin
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Keeping Wealth in the Family: How Family Banks Work
Keeping Wealth in the Family: How Family Banks Work 266 266 Noelle Merwin

For families with significant wealth, lending money to children, grandchildren or other relatives can be an effective way to provide financial assistance while preserving family assets. But informal arrangements can create complications. Without clear expectations, loans between relatives may lead to misunderstandings, strained relationships and unintended tax consequences. One way to avoid these problems is to create a family bank, a formal arrangement designed to manage intrafamily lending in an organized manner.

Benefits of intrafamily loans

Intrafamily loans can serve various purposes, such as purchasing a home, pursuing higher education, starting a business or addressing temporary financial difficulties. And they offer several advantages. For borrowers, they may provide access to financing that’s difficult to obtain through traditional lenders, often with more flexible repayment terms or lower interest rates. For lenders, they provide an opportunity to help loved ones achieve financial goals without making outright gifts. Assuming the loans are repaid, the funds can eventually be used to assist other family members.

Intrafamily loans can also be valuable estate planning tools. For example, if a borrower invests loan proceeds and earns a return that exceeds the interest rate charged, the excess appreciation generally remains with the borrower rather than becoming part of the lender’s estate.

However, it’s essential to structure these transactions properly to avoid having loans characterized as taxable gifts. Generally, lenders should document loans with written promissory notes, establish realistic repayment schedules and maintain records of payments. In addition, they should charge interest at least equal to the applicable federal rate (AFR) for the loan’s term. Borrowers also must have a reasonable ability and genuine intention to repay their loans.

How a family bank works

Although individual intrafamily loans can be effective, managing multiple loans to different relatives can become complicated. Questions may arise about who qualifies for assistance, how much each person can borrow and whether some family members receive preferential treatment. A family bank addresses these concerns by creating a centralized system for making and administering loans. By evaluating requests according to predetermined standards, it can help preserve family wealth, encourage financial responsibility and reduce disputes.

Despite its name, a family bank typically isn’t a chartered financial institution. Rather, it’s a family-funded arrangement that operates under established lending policies. Depending on the circumstances, it may be organized as a limited liability company, partnership or another legal structure.

Set clear lending policies

A family bank’s success depends largely on its governance structure. Clear policies and consistent administration help ensure that lending decisions are made objectively and borrowers understand their obligations.

For example, a family bank should define eligibility requirements, maximum loan amounts, acceptable uses of borrowed funds and repayment expectations. It should also specify how loan requests are evaluated and what happens if borrowers encounter financial difficulties.

Families may appoint a committee to oversee lending activities and involve independent advisors to provide objectivity. Transparency is also important. Family members should understand the bank’s purpose and lending guidelines, even if individual borrowers’ financial information remains confidential.

A strategy worth considering

Beyond providing financial support, a family bank can teach younger generations about borrowing, budgeting and responsible money management. It can also help families promote fairness and shared financial values. However, this approach isn’t appropriate for every family. Creating and administering one involves legal, tax and practical considerations. Contact us to discuss whether intrafamily loans or a family bank might fit into your family’s wealth transfer strategy.
Contact your Smolin representative to start the conversation. 

  • Noelle Merwin
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Passing Down Wealth? Don’t Forget the GST Tax
Passing Down Wealth? Don’t Forget the GST Tax 266 266 Noelle Merwin

If your estate plan includes gifts, bequests or other transfers to grandchildren, great-grandchildren or other beneficiaries decades younger than you, the generation-skipping transfer (GST) tax deserves careful attention. Without proper planning, transfers that skip a generation can potentially trigger a significant federal tax in addition to gift or estate taxes.

GST tax rules at a glance

The GST tax is designed to prevent families from avoiding transfer tax at one or more generational levels. Generally, this tax applies to certain transfers to a “skip person.” A skip person may be a grandchild or another family member who’s two or more generations below the person making the transfer. An unrelated individual generally is considered a skip person if he or she is more than 37½ years younger than the transferor.

GSTs generally fall into three categories: direct skips, taxable distributions and taxable terminations. Depending on the circumstances, the GST tax may apply to an outright gift or bequest to a skip person, a distribution from a trust, or a termination of a beneficiary’s interest that leaves only skip persons with interests in the trust.

The GST tax rate is 40%. Fortunately, a $15 million GST tax exemption is available. It’s separate from the $15 million gift and estate tax exemption.

But under the annual gift tax exclusion, you can exclude from gift tax certain gifts of up to the annual exclusion amount — $19,000 per recipient for 2026 (twice that if your spouse elects to split the gift with you or you’re giving community property) — without using up any of your gift and estate tax exemption. And annual exclusion gifts are generally also exempt from the GST tax.

Beware of a few pitfalls

Automatic allocation rules for the GST tax exemption can reduce the risk that you’ll inadvertently fail to allocate it to GSTs. For example, the GST tax exemption generally will be automatically allocated to certain direct skips and to transfers to trusts that meet the definition of a “GST trust.”

Automatic allocation can be useful, but it doesn’t always produce the desired result. For example, depending on the trust’s beneficiaries and your estate planning objectives, the exemption may be allocated to a trust that has little chance of generating a GST tax, wasting your exemption.

To avoid this result — and preserve your exemption for transfers that are more likely to trigger GST taxes — elect to opt out of automatic allocation on a timely filed gift tax return. If you neglect to opt out, you may still be able to obtain relief from the IRS. Doing so allows you to make a late election so long as you can demonstrate that you acted reasonably and in good faith.

Another potential issue can arise when a trust has both skip-person and non-skip-person beneficiaries and the GST exemption has been allocated to only part of the trust. The trust then will have an “inclusion ratio” between zero and one.

A trust’s inclusion ratio refers to the portion of a trust’s assets that will be subject to the GST tax if a taxable event occurs. If you haven’t allocated any of your exemption to a trust, its inclusion ratio is 1.0. If the exemption protects a trust’s assets, its inclusion ratio is 0.0. So, if the inclusion ratio is, for example, 0.5, then only 50% of the distributions to skip persons will be exempt from the GST tax.

In some situations, it may be possible to divide, or sever, a trust into separate trusts so that one has an inclusion ratio of zero and the other has an inclusion ratio of one. This approach may make it easier to administer the trusts and direct GST-exempt assets toward skip persons.

Review your GST tax strategy regularly

If your estate plan includes multigenerational trusts or significant transfers to grandchildren or other younger beneficiaries, review your GST exemption allocation, trust provisions and previous gift tax returns periodically. We can help determine whether your current strategy is using the available exemption effectively and identify opportunities to minimize unnecessary GST tax exposure. Contact your Smolin representative to start the conversation. 

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