The Benefits of a Charitable Remainder Trust

A charitable remainder trust (CRT) is an irrevocable trust set up to benefit a charitable organization. The trust’s term is one lifetime, several lifetimes, or a period not to exceed 20 years. Basically, you irrevocably gift an asset to the CRT, usually an asset with a low tax basis that has appreciated significantly. During the trust’s term, you receive a certain amount of income and/or capital annually (called the retained interest). At the trust’s termination, the charitable organization receives the remaining assets (called the remainder interest).

CRTs offer several benefits:

• Since the trust is a tax-exempt organization, the CRT can sell the asset and reinvest the proceeds without paying capital gains taxes. Selling the asset yourself could result in a significant capital gains tax bill.

• You get a current income tax deduction equal to the value of the remainder interest that will eventually go to the charity. That value is based on your life expectancy, the payout percentage, and an interest rate designated by the Internal Revenue Service. The older you are and the lower the interest rate and payout percentage, the higher your tax deduction will be. This deduction is subject to limitations on charitable contributions, but any excess deduction can be carried forward five years.
• The asset is removed from your estate when it is transferred to the CRT, so it won’t be subject to estate taxes after your death.
• You receive an income stream for life or for a designated period.
• You make a substantial gift to a favorite charity.

There are two basic types of CRTs:

• A Charitable Remainder Annuity Trust (CRAT) pays the donor a fixed annual annuity (not less than 5%), based on the trust’s initial value.
• A Charitable Remainder Unitrust (CRUT) pays the donor a percentage of the assets’ overall value (not less than 5%), which is calculated every year.

CRUTs are typically preferred since the annual distribution amount rises as the assets’ value rises.

Keep in mind that the gifted asset is removed from your estate and won’t be available to your heirs after your death. Thus, many individuals purchase life insurance to replace the value of the gifted assets. If the insurance policy is properly structured, your heirs can receive the proceeds both income and estate-tax free.