Charitable Remainder Trust

What is a Charitable Remainder Trust?

A Charitable Remainder Trust (‘CRT”) is a type of “split interest” gift.  It is an irrevocable trust through which you split part to keep for yourself and part to give to charity.  The two parts typically consist of the income (which can be for life or a term of years), and the residual value at passing.  The Grantor of the Charitable Remainder Trust is also typically the “Donor” – the person contributing the property.  The Grantor may also be the Trustee.  Sometimes the target charity is the Trustee. 

The Trustee has the right and the responsibility to invest the Trust assets, do the accounting, payout the required amounts, and prepare and file all tax reporting documents.  Sometimes, when the Grantor/Donor is also the Trustee, they will engage a third party administrator to assist in these duties.  Such an administrator generally does not take custody of the assets, but helps with the math and the paperwork.

Because the assets of a Charitable Remainder Trust are invested in the market, it is subject to market risk and reward.  If the market goes up or down, it can affect the resulting payouts and residual amounts accordingly.

Timing is Everything

A Charitable Remainder Trust can be established while you are living, or when you pass (Testamentary).  When you establish and fund the the CRT determines when you get the tax deduction.  If you want the deduction during your lifetime, establish the CRT while you are living.  This is most useful, for example, when are gifting highly appreciated assets to the CRT, and will have the effect of deferring or avoiding capital gains tax.  There are situations when a “Testamentary CRT” funded at death is beneficial.  For example, when the lifetime beneficiaries are too young for the economies of the CRT to work or when the CRT is going to be the beneficiary of Retirement Assets.

A Charitable Remainder Trust can result in a number of tax benefits.

First, there is a tax deduction when property is gifted to a CRT.  This will be an actuarial calculation of “the present value of a future interest” based on IRS tables.  Again, the timing of the gift determines the timing of the deduction.

Second, when asset are gifted to and sold by a Charitable Remainder Trust, the capital gains tax can be deferred or avoided.  While a person should always have “charitable intent” in forming and using a CRT, the tax incentives are often what inspire such charitable intent.

Third, assets in a CRT are excluded from the taxable estate of the Grantor/Donor and therefore NOT taxed at death.

Fourth, when properly structured life insurance owned by a Dynasty Trust is used as an asset replacement device, the net proceeds to the family will be income tax free and estate tax free.

Fifth, an often little understood consequence of funding a CRT is that the assets in the CRT are NOT marital assets and cannot be awarded to either spouse on divorce.  The income stream, however, can be split in the event of divorce.

In virtually all instances, a CRT must be set up and the property gifted BEFORE there is a sale.

Types of Charitable Remainder Trusts

There are a number of different types of Charitable Remainder Trusts.  Some of the most common ones include:

• Charitable Remainder UniTrust
• Charitable Remainder Annuity Trust
• Charitable Lead Trust
• Net Income Charitable Remainder Unitrust
• Flip Charitable Remainder Unitrust

Which Charitable Remainder Trust is Best?

Each type of CRT is designed for a particular purpose.  This is not a one size fits all situation.  Careful planning with tax and legal counsel is essential to help Donor’s accomplish what they actually want.  The type of CRT is also a different question than the type of charitable remainder.  It is very powerful to combine the CRT with a Family Foundation.

Does a CRT disinherit the children or heirs?  Sometimes, but not necessarily.  Sometimes the children or heirs are the income beneficiaries of the CRT, particularly for testamentary CRT’s (CRT’s funded at death).  There are also a number of asset replacement strategies, including life insurance.  Sometimes, with other gifting or provisions for children or heirs, there is “enough” without the assets in the CRT.  It has been our experience that families that give to charity have a healthier relationship with wealth over multiple generations.  The best scenario is when the CRT is set up not just for the tax benefits, but because of a genuine desire to benefit charity.  What happens to the Family is a major factor in weighing whether or not a CRT is right for you.

A CRT will produce the best results when it is carefully considered in a Family Council on an age and capacity appropriate basis.

The CRT vs. the Family Foundation

A Charitable Remainder Trust is NOT the same thing as a Family Foundation.  When you contribute something to a Family Foundation, you give away the whole thing.  You don’t retain anything.  With a CRT, you retain something such as the income.  The CRT can pay to your Family Foundation when you pass.

Who Would Benefit from a Charitable Remainder Trust?

• Charitable Intent
• Highly Appreciated Assets
• Large or Complex Estates
• People with no children
• Those who wish to provide income only for a family member
• Those who wish to disinherit family members

The Numbers Reveal the Deal

To only way to find out if a Charitable Remainder Trust is going to be a good idea is to run the numbers.  These are the numbers that matter:

• Age(s)
• Fair Market Value of asset being contributed
• Cost Basis of assets being contributed

Do Something

Call or email today and we can help you run the numbers and evaluate whether or not this will work for you.