I had a bunch of equity in a startup that had a cost basis of, essentially, $0. Under normal circumstances, I would have sold this for $millions, and would have paid nearly 20% in capital gains taxes immediately.
Instead, I contributed my equity to a CRUT. I paid zero capital gains taxes at that moment, and the CRUT pays zero capital gains taxes ever. Also, because a contribution to the trust is a contribution in part to charity (with proportions calculated according to actuarial figures of my life expectancy), I got a charitable tax deduction of many million dollars which I was able to carry forward for many years.
Each year I owe taxes on the 5% which the CRUT distributes to me every year, but since this is capital gains income, it is taxed at a very low rate -- which is effectively reduced even further because it is offset by the charitable deduction which I have been able to carry forward.
The net effect is that I'm paying capital gains taxes in a tiny trickle over the remainder of my lifetime, and I also got a giant charitable deduction to offset those capital gains taxes. When I die, the principal in the trust goes to charity. The IRS will never get the kind of bite at this equity that I would intuitively expect it to get.
I don't understand how this capital gains tax loophole could be beneficial to society. I think it should be removed from the tax code.
Another side effect of the CRUT I hadn't anticipated: Occasionally, I note the intrusive thought that my continued life is the one and only barrier which is keeping a decent amount of capital from serving charitable purposes right now. That's honestly pretty depressing sometimes.
Thanks! I think I get it, but not fully yet: if you'd deplete the entire trust before dying, you'd have paid the same capital gains tax as you would've if you had not made the trust, correct? Just spread out over many years.
Why do you feel that it is a loophole if you pay the same, just at different times? (except over what you give to charity, but isn't charity untaxed pretty much across the board in the US?)
EDIT: by they way, yours is the first tax related comment that I recall reading that complains about unfair rules that are in your favour. Hats off, I had expected the opposite answer.
I came here to ask the same, @tkiley. It seems the main benefits of your CRUT are (a) deferring your capital gains taxes until later and (b) allowing you to make deductions for charitable giving. But ofc those come at a cost, namely that you don't get paid until later (5% yearly), and that you have to give to charity.
Can't anyone just give to charity and get a deduction? And doesn't everyone get taxed later when they're paid later?
You're right, a lot of the benefit is in deferring taxes to a later date. This deferral is quite valuable when you consider the time value of money and the fact that by spreading out $millions of gains over many decades, I get to put a lot more of the gains in a lower tax bracket, where if it all came in one year, it would basically all be taxed at 20%.
When you combine decades of deferral with the sizeable charitable deduction, it feels like double dipping. If putting equity in the crut only gave me one or the other (deferred taxation or a big deduction) that would seem intuitively fair. But both together? That feels absurd.
A is super useful because normally if you sold your stock to diversify, you'd need to pay capital gains then. If you do it in a CRUT, you don't have to pay until later.
You also get an upfront deduction, which could be bigger (or smaller) than what the charity eventually gets.
Whether that's bad depends on how you feel about the way your government spends tax money. Because you used a CRUT, the money that doesn't support you will go to some worthy charity, instead of funding a series of wars, pervasive surveillance, and cages for kids.
Of course the government also does many worthwhile things, but your extra money will be spent entirely on worthwhile things, and not at all on horrific ones.
The problem with this thinking is that only those privileged enough to take advantage of it get to pick how their tax money is spent.
I disagree with (even despise) some of the ways government spends our money, but should I get to choose like some special snowflake while most don't have the same opportunity?
This just enforces a rigged economy... and guess what? Many of the privileged few would support government programs the rest of the so called democracy wouldn't.
Your tacit assumption is that wealthy individuals who can take advantage of bullshit tax favoritism will spend that extra money in worthwhile (subjective) ways.
I would certainly prefer a government that doesn't spend money on horrific things at all. It'd be great if I could pay my taxes without feeling dirty. I'm hopeful that maybe, with a lot of hard work and creativity, we'll manage to fix our democracy.
But in the meantime, I don't think there's anything morally wrong about legally reducing taxes and sending the money to charity instead. I'd even argue that, since privilege is an issue, we should expand this opportunity beyond the privileged few.
I'm criticising the system more than the individual. That being said, I've noticed that people will rail against big brother and all these rules and yet turn around and take advantage of any flaw in the system because they can (everyone else is doing it!). Proving that we need hyper-specific and cumbersome rules because no one is capable of policing themselves.
That's true! I'm happy that I am paying low taxes. It just seems ridiculous that my effective tax rate is so much lower than the effective tax rate paid by other people.
As best I can make out, a CRUT reduces your tax burden dramatically if 1) you are young, and 2) you fund the CRUT with equity that has a very low cost basis. I don't think the tax code should contain a special magic wand that reduces tax liability so low for this particular situation, because this advantage seems unfair to people who accrue their wealth over a lifetime by more traditional means.
Seems it'd be a substantial savings even if only (2) is true. A 55-year-old who's retiring a bit early after holding Amazon for twenty years could avoid a lot of capital gains.
Thanks for this detailed explanation - it matches the conclusions I had after some research into the matter (stimulated by Derek's sharing his experience!).
I don't think you should ever feel guilty or depressed for... not dying! Really. Think that, unlike most cases, when you will eventually die, instead of passing your large fortune to your heirs, it will all go to charity. That's beautiful, and nice, and better than what most people do. Feel proud of it.
Recently, I read back through some of my forum posts on HN and elsewhere from the past ten years. In hindsight, I see that I often erred on the side of harshness, and often conflated cynicism and intelligence. As I get older, I see increasing value in a bias toward kindness. Thank you for your kind words.
Well, you don't really "own" capital, you've "just" earned an authorization to spend some amount per year. It's like a debit card thats auto refilled every year. In the meantime "your" capital is being invested and reinvested by various firms. If you owned a valuable lake and deprived others from using it while you're alive, that would be a different story. But money? Meh, those are completely virtual constructs.
Instead, I contributed my equity to a CRUT. I paid zero capital gains taxes at that moment, and the CRUT pays zero capital gains taxes ever. Also, because a contribution to the trust is a contribution in part to charity (with proportions calculated according to actuarial figures of my life expectancy), I got a charitable tax deduction of many million dollars which I was able to carry forward for many years.
Each year I owe taxes on the 5% which the CRUT distributes to me every year, but since this is capital gains income, it is taxed at a very low rate -- which is effectively reduced even further because it is offset by the charitable deduction which I have been able to carry forward.
The net effect is that I'm paying capital gains taxes in a tiny trickle over the remainder of my lifetime, and I also got a giant charitable deduction to offset those capital gains taxes. When I die, the principal in the trust goes to charity. The IRS will never get the kind of bite at this equity that I would intuitively expect it to get.
I don't understand how this capital gains tax loophole could be beneficial to society. I think it should be removed from the tax code.
Another side effect of the CRUT I hadn't anticipated: Occasionally, I note the intrusive thought that my continued life is the one and only barrier which is keeping a decent amount of capital from serving charitable purposes right now. That's honestly pretty depressing sometimes.