Forbes recently published an informative online piece on a new IRS Revenue Procedure that makes the use of Charitable Remainder Trusts (CRTs) as a means for tax deferral more achievable for art and collectibles. CRTs are generally used by those who are charitably minded and wish to sell a highly appreciated asset without having to pay a significant capital gains tax bill.
If the appreciated art is sold unconditionally by an art collector, the art collector, of course, would be responsible for income tax on the gain in the year of the sale. However, if the appreciated art is sold by a CRT, which is typically exempt from state and federal income taxes, the gain is taxed over a period of time as distributions are made from the CRT. In the meantime, the complete amount of sale proceeds unreduced by taxes can be reinvested by the CRT. Moreover, in the year the art is sold by the CRT, the art collector is eligible to take a charitable deduction on his or her individual tax return in which such deduction is based on the remainder value of the CRT that is projected (based on specific IRS formulas) to be given to charity.
So exactly how does a collectibles CRT work? Generally, art is transferred to the CRT by a collector and that art is sold by the trustee of the CRT who reinvests the proceeds in a portfolio of stocks and bonds. As discussed above, the transfer of art to the CRT and the subsequent sale of the art will not result in a current capital gains tax bill for either the art collector or the CRT.
The CRT then makes a series of annual payments to a non-charitable beneficiary, usually the art collector who created the trust (or a family member) for his or her life or for a term of years. The annual payments to the art collector or family member will be made from the CRT’s portfolio of assets, and the amount will vary depending on the structure of the CRT.”
This new change by the IRS is considered to have come at an “opportune time” with the Federal Reserve expected to increase interest rates later in the year as CRTs are most effective in higher interest environments. In the meantime, art collectors may wish to consider this new IRS Revenue Procedure as we wait to see what happens with federal interest rates in the months ahead.