(Important Note: AMA Members! Always Contact your Tax Advisor)!
Introduction:
Definition of a Charitable Remainder Trust (CRT):
- A Charitable Remainder Trust (CRT) is a tax-exempt irrevocable trust that provides income to beneficiaries for a specified period, with the remainder going to charitable organizations. What happens is the trust is funded, usually with appreciating assets.
Purpose and Benefits:
- Generate income for beneficiaries.
- Support charitable causes.
- Receive potential tax benefits.
- Encouragement for Strategic Estate and Charitable Planning: Consider a Charitable Remainder Trust's potential benefits in achieving financial and philanthropic goals.
How a CRT Works:
- Establishment and Funding: A grantor establishes the CRT and funds it with cash, securities, real estate, or other appreciated assets.
- Income Distribution to Beneficiaries: The CRT pays a fixed percentage of its value annually to the income beneficiaries, who can be the grantor and/or other individuals.
- Charitable Remainder Beneficiary: After the income period ends or beneficiaries pass away, the remainder of the trust assets goes to one or more charitable organizations.
- Final Distribution to Charitable Organizations: The trustee distributes the remaining trust assets to the designated charitable organizations.
Key Players in a CRT:
Grantor:
- The individual or entity that establishes and funds the CRT.
Trustee:
- Responsible for managing the trust assets and making distributions according to the trust terms.
Income Beneficiaries:
- Individuals who receive income payments from the CRT during its term.
Charitable Remainder Beneficiary:
- The charitable organization(s) designated to receive the remainder of the trust assets.
Features and Characteristics:
- Types of CRTs:
- Charitable Remainder Annuity Trust (CRAT)
- Charitable Remainder Unitrust (CRUT)
- Income Distribution Options: CRATs provide a fixed annual percentage of the initial contribution, while CRUTs distribute a fixed percentage of the trust's annual value.
- Charitable Remainder Amount: The percentage of the trust assets designated for charitable beneficiaries upon termination.
- Tax Advantages: Grantors may receive income tax deductions, avoid capital gains taxes on contributed appreciated assets, and reduce their taxable estate.
Tax Implications:
- Income Tax Benefits: The grantor may receive an immediate income tax deduction based on the present value of the charitable remainder interest.
- Capital Gains Tax Benefits: Contributions of appreciated assets to the CRT can defer or eliminate capital gains taxes.
- Estate Tax Considerations: Assets placed in the CRT are generally removed from the grantor's taxable estate, potentially reducing estate taxes.
Best Practices for CRT Planning:
- Financial and Estate Planning Goals: Align the establishment of a CRT with broader financial and estate planning objectives.
- Selection of Trustee and Remainder Beneficiary: Carefully choose a trustee for effective trust administration and select charitable organizations that align with the grantor's values.
- Asset Selection and Funding: Consider contributing highly appreciated assets to maximize tax benefits.
Common Misconceptions:
- Loss of Control: Grantors can retain certain powers, such as choosing the trustee and changing charitable remainder beneficiaries.
- Complexity of Administration: While CRTs require careful administration, professional trustees can simplify the process.
- Limited Charitable Choices: Grantors have flexibility in selecting charitable organizations to benefit from the trust remainder.
Funding a Charitable Remainder Trust with an IRA:
- One common way that individuals get around estate taxes and income taxes when leaving an IRA to a family member is to make a charitable remainder trust the beneficiary of an IRA. In this case, the money technically goes to a charity, but at the same time, permits the beneficiary of the trust to receive an ongoing stream of payments funded by that IRA. Only as the heirs receive the payments will they have to pay taxes on the amount received.
- To remain a qualified trust, the charitable remainder interest must be at least 10% of the trust’s value. So, if the IRA is valued at $1 million, the amount reserved for charity must be at least $100,000. Annual distributions to heirs can’t be less than 5%, but they also can’t be more than 50% of that initial value.
Please note: this information is generally accurate; the specifics can vary depending on the laws and regulations of the jurisdiction in which the CRT is established. Therefore, it’s always a good idea to consult with a financial advisor or legal professional when considering a CRT.
