Author: Leanne Broyles

Part II

In Part I of this post we reviewed the importance of discussing planned giving with your financial advisors. This month’s post focuses on just one way to give. The Charitable Remainder Trust is a popular planned giving tool that offers many benefits for philanthropists. If you are a good candidate, the “CRT” can make a positive impact on your life and also that of your charitable beneficiary!

This post is a brief overview of the CRT. It summarizes how these flexible and customizable trusts work to demonstrate how they can benefit certain individuals. For more information, speak with your estate planning attorney or financial/tax advisor.

The Charitable Remainder Trust is what we call a “split interest” trust. It garners this name by splitting the beneficial interest in the trust two ways: generally between current (you) and remainder (your charity of choice). When structured properly, the CRT provides a fair market value income tax deduction for the remainder portion of the trust (the value of which is based on the actuarial life expectancy of the donor). It provides an income stream for life for the individual who creates it, which can be structured as an annuity (a “CRAT”) or a unitrust (a “CRUT”). When you pass away, the assets remaining in the trust go to the charity of your choice. CRUTS and CRATS are fantastic tools for those who own appreciated assets that would produce unwieldy capital gain taxes upon sale, but that generate below-market returns.
Take, for example, a couple who owns low-yield, highly appreciated stock worth $500,000 with a basis of $75,000 that generates a 2% annual return. If the couple prefers to get a better rate of return, they would need to sell the asset, and upon sale they would generally recognize a capital gain of $425,000 and pay the corresponding tax absent some sort of tax-free exchange. Assuming the lowest current 15% capital gain tax rate, they would lose nearly $64,000 to federal income tax.

As an alternative, by contributing the same asset to a CRT, they would receive a large up front income tax deduction for the remainder value of the trust. They would also generate $30,000 a year in income from the trust assuming a 6% annuity (up from $10,000 at 2%), avoid that substantial capital gain tax on the sale of the assets, and leave a legacy to their chosen charity at death!

Your estate planning attorney and financial advisors can help you determine if a CRT is right for you.

1. Note that these trusts can also be drafted to benefit other family members, such as a surviving spouse. If the income beneficiary of the trust is not you or your spouse, you would have to deal with filing a gift tax return.

2. Note that these trusts can also be established for a shorter term of years rather than for life as an alternative. This would impact the amount of the income tax deduction, because it would change the value of the remainder.

3. Because the CRT doesn’t pay income tax, it can sell the low-basis assets and reinvest them without paying capital gain tax on the sale. This is true as long as the trust isn’t legally bound to sell the assets.