A Charitable Remainder Trust (CRT) is an irrevocable trust that combines payments to one or more noncharitable beneficiaries with a remainder gift to charity. A qualifying CRT may defer income tax on the sale of appreciated assets transferred to it, but it does not make the gain permanently tax-free. Beneficiary payments can carry out taxable income and capital gains.
A CRT can support charitable goals, provide payments for life or a term of up to 20 years, and allow investments to be diversified within the trust. Depending on the arrangement, the donor may qualify for a partial charitable deduction based on the charitable remainder interest, subject to applicable limits. The charity must receive the remainder when the payment term ends.
The donor transfers assets to a qualifying irrevocable trust, which makes the prescribed payments and ultimately distributes the remainder to charity. Contributed assets cannot simply be taken back with beneficiary permission. A qualifying CRT is generally exempt from income tax, but special rules, including an excise tax on unrelated business taxable income, can apply. Taxable income and gains may be recognized by beneficiaries as payments are made.
This is a strategy that provides possible tax savings, and it also allows the trustor to fulfill philanthropic goals and still generate income. It may also be beneficial for retirement and estate planning.
Yes, there are two main types of CRTs you can choose from depending on your goals. The first one is called CRAT or Charitable Remainder Annuity Trust. This type of trust results in the distribution of a fixed annuity each year, i.e., it pays a fixed-dollar amount of the trust assets every year.
The second option is a Charitable Remainder Unitrust (CRUT). It generally pays a fixed percentage of the trust’s assets as valued annually, so the dollar payment can change each year. The required payout percentage is at least 5% and no more than 50%, and the trust must satisfy the charitable remainder-value requirement and other qualification rules.
CRT payments follow tax-ordering rules: ordinary income first, then capital gains, then other income, and finally trust principal, to the extent applicable. A donor’s potential charitable deduction is based on the present value of the charitable remainder, rather than the full amount contributed, and is subject to applicable limits. The trust’s term, payout structure, and beneficiary information affect the calculation.
For many individual beneficiaries of IRA owners who died after 2019, the SECURE Act requires the inherited account to be emptied by the end of the tenth year after death. Eligible designated beneficiaries, including a surviving spouse, certain disabled or chronically ill individuals, the owner’s minor child, and individuals not more than ten years younger than the owner, can qualify for different treatment. Trust beneficiaries require separate analysis. Naming a CRT does not create a blanket exception or guarantee a lifetime stretch; the retirement account’s distribution rules and the CRT’s payments must be coordinated.
There are many complexities and rules involved in properly setting up a Charitable Remainder Trust as a key piece of your estate plan. If you think this is an option you would like to learn more about, the best next step is to consult an estate planning professional who is knowledgeable in the area of planned giving strategies. The Law Offices of Boyd Boyd are available to help you explore whether this specific strategy is right for you, and if that is the case, we are equipped to customize a charitable trust arrangement that takes into consideration your personal, financial, tax, estate, and succession planning objectives.
Call us at (508) 444-9688 or stop by our office to schedule a consultation with one of our estate planning attorneys.
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