Charitable Remainder Trust – is it right for you?

What is a charitable remainder trust?

A charitable remainder trust, or otherwise known as a CRT, is an estate planning technique that allows an individual to achieve their philanthropic goals, it can provide you with a source of income during your lifetime and it can also help you diversify a single asset or many assets with low basis in a tax efficient manner.  There are also what is know as charitable lead annuity Trusts or charitable lead unitrusts or otherwise known as CLAT or CLUT.  These work inversely to charitable remainder trust where the 501(c)(3) charity retains a current interest in the trust rather than a remaining interest.

This blog will focus charitable remainder trusts.   There are two main types of CRT’s.

• A charitable remainder annuity trust is the type of trust that pays a fixed annuity amount annually and additional contributions are not allowed. The amount of the annuity payment will never change during the duration of the trust.
• A charitable remainder unitrust is the type of trust that pays a fixed percentage of the trust fair market value which is revalued each year and additions to the trust are allowable. Because this is reviewed annually the amount of income paid each year will vary.

When you decide which type of charitable remainder trust works for you must establish the trust through an irrevocable trust agreement.  The trust agreement must meet IRS eligibility requirements.  You must name a trustee of your CRT.  The trustee can then manage tasks like; directing trust investments, managing distributions, trust administrative expenses and tax preparation services.

Once the trust is established the Grantor does have flexibility in selecting the beneficiaries for the trust, both current and remainder beneficiaries.  The remainder beneficiary(s) needs to be a qualified 501(c)(3) charity. The next step is contributing to the trust in the form of cash, securities, certain closely held stocks, real estate, artwork, or other unique assets like crypto currency. If you fund a CRT with low basis stock(s), the low basis stock(s) can be sold within the trust and there would be no capital gains tax realized on the sale.  Depending on how you have the trust agreement drafted the beneficiary(s) can receive any income from the trust either annually, monthly, quarterly, or semi-annually and the annual payout must be at least 5% but no more than 50% of the trust fair market value.  This is in accordance with IRS requirements. The maximum term of a CRT may not exceed 20 years as per IRS guidelines.  Once the trust terminates the remaining assets in the trust are to be distributed outright to the charitable remainder beneficiary or beneficiaries you have designated in the trust agreement.

Advantages of this planning technique

• Grantor will receive a partial tax deduction for the property that is gifted.
• The assets that are contributed into the trust are no longer part of your estate at your death.
• The power to choose specific charities that will receive the assets upon the termination of CRT
• It can provide you with an income stream during your lifetime or to provide others with an income stream during their lifetime.

Disadvantages of this planning technique

• A CRT is an irrevocable trust, meaning the trust cannot be revoked or amended after it has been established and you no longer have control over the assets.
• You are not leaving any assets to your heirs after the trust runs its course.
• A Grantor should have substantial wealth because only a contribution of substantial assets makes sense to reap the benefits of the tax advantage.
• Distributions from a CRT to the income beneficiaries may be treated as taxable income to them during their lifetime.

In closing this is a common estate and tax planning technique.  I administer many CRT’s here at FSTC where we either serve as trustee, co-trustee, or administrative agent.  In my opinion establishing a CRT is very tax efficient way to provide yourself or a family member with income during their lifetime and a great way to achieve your philanthropic intentions while at the same time preserving your legacy.  Please feel free to reach out with any questions at 302-573-5959.  I can also refer you to a local attorney to assist you with the drafting of the trust agreement.

Christopher Carr, Vice President, and Lead Trust Officer
ccarr@fs-trust.com

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.  FSTC does not offer tax, legal, or investment advice, professional counsel should be sought for tax or legal advice.