What is a Charitable Remainder Trust (CRT)?
Trusts can provide a safety net that helps provide for ourselves or our loved ones. Those with the means to pursue philanthropy may be curious about how their charitable goals fit into their financial plans that include trusts.
A charitable remainder trust is an irrevocable trust that holds a potential stream for donors to the CRT or its beneficiaries. The remainder of the donated assets are distributed to one or more of your favorite charities. This giving strategy creates income and allows the account holder to pursue their philanthropic goals while also providing for living expenses. People who set up these trusts often offer flexibility and control over the charitable beneficiaries and lifetime income, helping provide retirement income, estate planning and tax management.
How It Works
A split-interest giving vehicle, a CRT allows owners to make contributions to the trust. They are eligible for a partial tax deduction, based on the account’s assets that will pass to charities. The account holder can name themselves or someone else to receive income for a term, but no longer than 20 years or for the life of one or more non-charitable beneficiaries. Then, owners must identify which charities will receive the remainder of the donated assets. Two main types of CRTs include:
Charitable remainder annuity trusts (CRATs) — In this format, the asset holder distributes a fixed annuity amount every year. It does not permit additional contributions.
Charitable remainder unitrusts (CRUTs) — A fixed percentage is distributed based on the balance of the true assets, which are revalued each year. In this format, additional contributions are accepted.
The contributions made to both CRTs are an irrevocable transfer of cash or property. Both are required to give a portion of income or principal to the donor or another beneficiary. When the specified lifetime ends or meets its term limit for the income interest, the remainder of the true assets is then given to one or more CRT beneficiaries.
Below are a few steps of how the CRT process works:
The first step is to make a partially tax-deductible donation. You can donate cash, stocks or non-publicly traded assets like real estate, private business interests or private company stock. You may be eligible to earn a partial tax deduction, based on the type of trust, its term, and the expected income. IRS interest rates will also estimate any specific rate of growth and trust income.
The trust holder or its chosen beneficiaries receive an income stream based on how they set up the trust. Both can receive income on an annual, semi-annual, quarterly or monthly basis. According to the IRS, the yearly annuity must be between 5% and 50% of the trust’s assets.
After the term limit is up or there is a death of the last beneficiary, the remaining CRT assets are given to the designated charitable beneficiaries. The beneficiaries can include public charities or private foundations. Depending on the type of CRT created, the trustees may have the opportunity to change the CRT charitable beneficiaries during the trust’s lifetime.
The Benefits
There are many reasons and critical benefits that someone would want to establish a CRT.
They preserve the value of highly appreciated assets. If someone has long-term appreciated assets, like non-income producing property, CRTs allow the owners to contribute property to the trust. When the trust sells the asset, it is exempt from tax. When the assets are donated in-kind to the CRT, the holder will preserve their full fair market value of the property/assets and then reduce it by a large capital gains tax. This allows more money for the income and charitable beneficiaries.
CRTs offer income tax deductions. CRTs potentially allow owners to take partial income tax charitable deductions when funding their trusts. It’s based on calculating the remainder distribution to the charitable beneficiary.
CRT investment income is tax-exempt. These trusts are a great option to diversify assets. Many may want to consider donating their low-base assets to the trust so that when they’re sold, they owe no income tax and a capital gains tax can be eliminated on the asset’s sale. However, the beneficiary of the CRT will pay income tax on the income stream they received.