Cryptocurrency & Charitable Remainder Trusts
As cryptocurrency has risen in popularity, many investors have begun looking for ways to maximize the benefit of their highly appreciated digital assets. Philanthropically-minded individuals have turned to a number of charitable avenues, taking large income tax deductions and bypassing capital gains. One of the more popular solutions for these individuals is a charitable remainder trust (CRT).
At the start of 2021, Bitcoin was valued at nearly $30,000, a 309% rise from the beginning of 2020. By April 2021, Bitcoin reached its all-time high of $64,829.14. Yet by the arrival of summer, Bitcoin returned to a more modest average around $35,000.
If an investor held 10 Bitcoin in early 2020, he or she would have seen the value rise from $70,000 to a peak of more than $648,000 in just over a year and a half. Often, the number of coins held is much larger, given the relatively low prices of Bitcoin over the last decade. When the market spikes, these investors look for ways to lock in their value.
Due to the cutting-edge nature of this type of asset, the majority of these donors are much younger than the typical planned giving prospect. Digital assets have become trendy among investors between 25 and 50 years of age. Many cryptocurrency-to-CRT donors are in their mid- to late-30s. The usual age range for CRT donors starts closer to age 65.
This demographic issue can cause some difficulty with CRT planning. With a lifetime payout CRT, for example, younger donors will receive lower charitable deductions than older individuals. A 30-year old who sets up a $100,000 CRT might receive a deduction of only $11,000, whereas a 65-year old in the same situation would take a $45,000 deduction. The benefit to the donor includes the tax free sale of the digital asset by the trustee and the bypass on the capital gains at the time of funding. The donor would benefit from lifetime payments from the CRT.
Nevertheless, these investors are eager to lock in their gains when the market rises. While Bitcoin is the most popular digital currency, plenty of investors also hold large amounts of other cryptocurrencies, including Ethereum. Typically, the CRT is funded and the funding asset is sold as quickly as possible. A prudent investor may retain some portion of the original funding asset, but in most cases a majority of the asset is typically sold and reinvested. This helps mitigate the volatility inherent to cryptocurrency. The donor takes a deduction based on the fair market value of the asset on the date of the gift and the trust is able to reinvest in assets that are traditionally more stable than cryptocurrency.
The great majority of these CRTs are configured as net income plus makeup charitable remainder unitrusts (NIMCRUTs). This allows the trust to make little to no payout for a period of time, maximizing the trust’s growth potential. The NIMCRUT structure may be ideal and most appealing for young donors who are in their prime earning years and may not need the added CRT income until later on.
Investors who are anxious about the volatile state of the cryptocurrency market may find charitable remainder trusts to be a helpful solution. By donating their cryptocurrency when the market peaks, these taxpayers are able to benefit their favorite nonprofits, lock in value and set up a payment stream for their retirement years.