Helping Your Heirs AND Others Through Giving

What is a charitable remainder trust (CRT)?

According to Investopedia: A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. This is a split-interest giving vehicle that allows a trustor to make contributions, be eligible for a partial tax deduction, and donate remaining assets.

Why would I need a CRT?

A CRT can be an effective planning tool to avoid capital gains taxes on appreciated assets. However, income distributed to income beneficiaries is taxable. They get an income stream based on the full, fair market value (FMV) of those assets. You get an immediate charitable deduction, and ultimately to benefit the charities of your choice.

What’s the catch?

Charitable remainder trusts are irrevocable. In other words, you cannot modify or terminate the trust without the beneficiaries permission.

Some people might be hesitant to transfer assets to a CRT because they don’t want to lose control. Or maybe they would like to see their children receive the money. Transferring property to a CRT doesn’t mean your children cannot benefit.

You could apply charitable tax savings income from the CRT to buy life insurance in an irrevocable life insurance trust. After the death of the last income beneficiary, the charity receives the remaining assets in the CRT. Your children receive tax-free life insurance proceeds. Sometimes policy proceeds may be equal to or even exceed, the value of the transferred property.

General Guidelines

A CRT starts with a contribution of assets—usually highly appreciated—into an irrevocable trust. Once funded, the trustee pays the non-charitable beneficiaries an income each year for their lifetimes or a term of years.

Terms cannot exceed 20 years. Income beneficiaries must receive at least 5% of the trust’s assets, but not more than 50%. The charitable remainder interest cannot be less than 10% of the value of the contributed assets.

Additional Benefits

Because a CRT is tax exempt, the trustee can sell highly appreciated assets tax-free and diversify to meet trust objectives. Donated assets are removed from your estate avoiding future estate taxation and reducing probate costs. Donated assets are also protected from the claims of creditors. This feature is attractive to business owners concerned about liability or to those sensitive about issues around assets in a divorce.

Deductions may have limits. It depends on the type of property donated, the kind of organization(s) receiving the gift, the donor’s tax status, the age(s) of the income beneficiaries, and the trust’s income payout provisions. If a deduction is limited for the current year’s tax return, Internal Revenue Service (IRS) rules allow unused amounts to carry forward for up to five additional, consecutive tax years.

Moreover, since donations of appreciated property are no longer preference items for the alternative minimum tax (AMT), donating such property may now be much more advantageous. (Under prior law, the AMT could, in many cases, have significantly trimmed the potential income tax deduction available for donations of appreciated property.)

Takeaway

There’s no escaping death and taxation. But how you give your assets, and whether you get a deduction are things you have some control over. A CRT could be a good choice for you if you can handle giving up control over assets you don’t need now. As with all complex financial transactions, seek the assistance of your estate planning team for help.