Yes, you absolutely can fund a charitable remainder trust (CRT) with a business interest, though it’s considerably more complex than funding it with liquid assets like cash or publicly traded stock. A CRT is an irrevocable trust that provides an income stream to the donor (or other designated beneficiaries) for a specified period, with the remainder going to a qualified charity. While seemingly straightforward, using a closely held business interest as the primary asset requires careful planning and valuation to ensure compliance with IRS regulations and achieve the desired tax benefits. According to a study by the National Philanthropic Trust, approximately 12% of all charitable remainder trusts are funded with illiquid assets, with business interests being a significant portion of that figure.
What are the Tax Benefits of Donating a Business Interest?
Donating a business interest to a CRT allows you to potentially deduct the present value of the remainder interest – that is, the value of what the charity will ultimately receive – from your income tax. This deduction is subject to certain limitations based on your adjusted gross income (AGI) and the type of property donated. The immediate tax benefits can be substantial, particularly if the business interest is appreciating. However, the IRS scrutinizes these donations closely, requiring a qualified appraisal to determine fair market value. For example, a business valued at $1 million, with a 5% payout rate to the donor for 20 years, might generate an initial charitable deduction of around $672,000, depending on IRS interest rate tables and the donor’s life expectancy.
How Do You Value a Closely Held Business for a CRT?
Valuing a closely held business is significantly more complex than valuing publicly traded stock. It requires a qualified appraiser who specializes in business valuations and understands the applicable IRS regulations, specifically Revenue Ruling 56-66. Common valuation methods include discounted cash flow analysis, asset-based valuation, and comparable company analysis. It is critical that the appraisal is well-documented and supported by credible data. It is often helpful to have multiple appraisal options or estimates to ensure that the information is legitimate and correct. As of 2023, the IRS has seen a 20% increase in audit flags for charitable donations of business interests, highlighting the importance of a thorough valuation process.
What Happened When John Didn’t Get a Proper Valuation?
I remember working with John, a local business owner who had built a successful landscaping company over 30 years. He wanted to contribute a significant portion of his business to a CRT and reduce his estate taxes. Eager to simplify the process, he relied on a general business broker’s estimate for the business value, rather than engaging a qualified appraiser. The IRS subsequently challenged the valuation during an audit, claiming it was inflated. John found himself facing significant penalties and back taxes, not to mention the legal fees associated with defending the donation. He regretted not investing in a proper valuation upfront, as it would have saved him a great deal of time, money, and stress.
How Did Sarah’s Careful Planning Lead to Success?
On the other hand, I worked with Sarah, a tech entrepreneur who wanted to fund a CRT with shares in her rapidly growing software company. She understood the complexities involved and proactively engaged a qualified appraiser specializing in technology companies. The appraiser meticulously analyzed Sarah’s financial statements, market trends, and future projections to determine a fair market value. The appraisal was comprehensive, well-documented, and included a detailed explanation of the valuation methodology. When the IRS reviewed the donation, they accepted the appraised value without question, allowing Sarah to realize the intended tax benefits and fulfill her philanthropic goals. Sarah’s diligence was a perfect demonstration that when it comes to estate planning, it’s better to be careful than to cut corners, and planning to do so can lead to success.
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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
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Feel free to ask Attorney Steve Bliss about: “Should I name more than one executor for my will?” Or “What happens to jointly owned property during probate?” or “How do I make sure all my accounts are included in my trust? and even: “Will my wages be garnished during bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.