By Paul Tarins, IAR, RICP
A desire to give charitably is a significant part of what makes you who you are. When considering philanthropic investment options, you search for strategies and tools that will give you the most efficient returns possible, while addressing your need to give charitably. An understanding of how the Charitable Remainder Trust (CRT) operates is your golden key to a lifetime and beyond of charitable giving.
What is a Charitable Remainder Trust?
A CRT is a tax-exempt trust divided into two entities for the purposes of donating to the charity of your choice, while provisioning for a noncharitable beneficiary, such as the creator of the trust or any named individual or group.
How it Works:
By transferring low-cost basis assets to the CRT, two interests are created: income interest and remainder interest. The noncharitable beneficiary will receive income interest for a lifetime or at the conclusion of a designated term. The residual interest is passed on to a qualified charitable party, such as charities, family foundations, donor-advised funds, and others specified in the trust document, as a delayed lump-sum payment. An asset can be reallocated into any asset class or combination of assets that may be more appropriate to create the desired income stream, such as stocks, bonds, mutual funds, annuities and managed accounts.
Structuring Payments to Receive Income:
- Charitable Remainder Annuity Trust (CRAT), or Fixed Annuity:
In this type of trust, the trust pays out a fixed dollar amount, or annuity, to the noncharitable beneficiary every year, and the remaining assets transfer to the charity. This structure is beneficial because you will receive the safety-net feature of the same income amount regardless of whether the trust performs as expected or not. Once you designate the annuity amount, you will not be able to alter the amount. You have the option to make the payments as high as you want, but this will lower your income tax deduction and possibly use up most or all of the principal, significantly decreasing the remainder payment to the charity.
- Charitable Remainder Unitrust (CRUT), or Percentage of Trust Assets:
In the CRUT, the noncharitable beneficiary is paid an annual amount that fluctuates depending on the percentage designated by the creator of the trust and the current value of the trust property, while the charity receives the remainder of the assets at the end of the trust term.
- In both the CRAT and the CRUT, IRS parameters state that the distribution must be no less than 5% and no more than 50% annually. The charitable organization must receive at least 10% of the initial donation to the trust.
Benefits and Advantages of the CRT:
In addition to donating to the charity of your choice and ensuring your philanthropic legacy, there are immediate tax and other advantages to the CRT. Benefits include income tax exemption, the ability of the donor to claim a charitable deduction, and the ability to retain ongoing cash flow from a gifted asset.
- Income Tax Advantages:
Your charitable gift donation enables you to take a five-year income tax deduction for the value of your gift. The value of your contribution will decrease per the IRS convention that deducts the amount of income you’re likely to receive from the property from the actual value of your gift.
- Capital Gains and Estate Tax Advantages:
A CRT allows you to avoid paying capital gains tax on profits from appreciated property sales. Federal estate tax can be avoided with the CRT because as the trust property is moved to the charity, it’s removed from your estate and won’t subject you to estate taxes.
- Retirement and Lifetime Cash Flow Planning:
CRT-designed income deferral is a valuable tool in retirement planning and ensures a flow of cash across a broad spectrum of life events.
Why Choose the CRT?
The powerful benefits of establishing a Charitable Remainder Trust are manifold. By understanding the basis and structure of a CRT, you can discover various ways to give far more to charity than you ever thought possible, in a meaningful, extended manner. Combined with the immediate and direct benefits of tax efficiency, this can be a very favorable tool during your lifetime of giving.
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