Charitable Remainder Trusts

Description

A charitable remainder trust is an irrevocable trust that generates a potential income stream for its beneficiaries, with the remainder of the donated assets eventually going to one or more charitable organizations.

Key characteristics

  • Potential immediate (partial) tax deduction, based on the value of the remainder gift to charity
  • May eliminate capital gains tax for gifts of long-term appreciated securities
  • Accepts many types of assets
  • Income may be for life or for a fixed term of no more than 20 years
  • Requires setup and ongoing maintenance costs

Details

A charitable remainder trust (CRT) is an irrevocable trust typically funded with highly appreciated long-term property. The CRT is structured so that there is a current beneficiary, who is either the donor or a named individual, and a remainder beneficiary, which is a qualified charity, including private foundations. The CRT can provide that the named beneficiary receive either a fixed amount each year or a percentage of the value of the trust each year, for a period of years that can be for the individual's life or for a period not to exceed 20 years. Since the designated charitable beneficiary could be a private foundation, a CRT is sometimes used to "fund" a private foundation while preserving the additional benefits provided by a CRT.

One of the major benefits of the CRT is an immediate potential to take a charitable deduction against the income or gift tax for the present value of the trust's assets that are to pass to the qualified charity (the remainder beneficiary). If the remainder beneficiary of a CRT is a private foundation, there are certain limitations to the amount of the deduction that can be taken, which are dependent on the nature of the property contributed.

Second, a CRT is exempt from tax on its investment income. Thus, the trustee can sell the CRT's assets and reinvest the full proceeds. The donor may deem it to be advantageous to contribute a concentrated position to the CRT so that it can be sold in a tax-efficient manner and allow the donor to diversify his or her personal investments. When distributions are made to the current beneficiary (the donor or other named individual) pursuant to the terms of the trust, the recipient must report a portion of the income and gains with respect to the property distributed. However, as the tax burden is spread out over time, more money is available for reinvestment within the CRT, benefiting both the current beneficiary and charitable remainder beneficiary.

Third, a contribution to a CRT made at death under a will can provide for an estate tax deduction, not subject to any percentage limitations, with the value of the remainder interest passing to the charitable remainder beneficiary.

Finally, a CRT can be an effective strategy for retirement planning, as the trust can provide income distributions to the current beneficiary that do not commence immediately.