Charitable Remainder Trusts

Charitable Remainder Trusts (CRTs): A Powerful Tool for Giving and Planning

There are a number of charitable gifting strategies available to clients, but Charitable Remainder Trusts (CRTs) offer a strategic way for individuals to make significant charitable contributions while retaining income benefits and achieving tax advantages. At Bridge Law, LLP, we help clients establish CRTs that align with their philanthropic goals and financial objectives. In this article, we’ll explore what CRTs are, how they work, and why they may be a valuable tool for your estate planning strategy.

What is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust (CRT) is an irrevocable trust designed to provide income to the trust’s beneficiaries (often the donor or their family) for a specified period or for life. After this period ends, the remaining assets in the trust are distributed to one or more qualified charitable organizations. CRTs are a popular choice for individuals looking to support charities while also securing income and tax benefits for themselves or their loved ones.

As explained below, a CRT is a very popular choice for those looking to sell an asset with low basis and high capital gains.

There are two main types of CRTs:

1. Charitable Remainder Annuity Trusts (CRATs): These provide a fixed annual income to the beneficiaries based on the initial value of the assets placed in the trust.

Click here for a more detailed article on Charitable Remainder Annuity Trusts (CRATs).

2. Charitable Remainder Unitrusts (CRUTs): These offer beneficiaries a variable income, calculated as a percentage of the trust’s value, which is revalued annually. CRUTs allow for greater flexibility, particularly if the trust’s assets are expected to appreciate over time.

There are 3 types of Charitable Remainder Unitrusts; for a more detailed article on those, click here.

How Do CRTs Work?

Setting up a CRT involves transferring appreciated assets—such as real estate, stocks, or other investments—into the trust. Once the assets are in the trust, several key steps occur:

1. Tax Deduction: The donor receives an immediate partial charitable income tax deduction based on the present value of the future charitable gift. The amount of this deduction depends on factors such as the donor’s age, the payout rate, and the term of the trust.
2. Income Stream: The trust sells the appreciated assets, typically without incurring immediate capital gains taxes, and invests the proceeds. The donor or other named beneficiaries receive income from the trust, either as a fixed annuity (CRAT) or a percentage of the trust’s annual value (CRUT). This taxable income continues for the specified period or for the lifetime of the beneficiaries.
3. Remainder Distribution: At the end of the trust term, the remaining assets are distributed to the chosen charitable organizations. This provides a meaningful gift to the charity while allowing the donor to enjoy income benefits during their lifetime.

A CRT will be considered legal and valid if at the time of creating the CRT, we respect the 10% rule. The 10% rule for Charitable Remainder Trusts (CRTs) is a critical requirement set by the IRS to ensure that these trusts qualify for their tax benefits. According to this rule, the value of the remainder interest in the trust—meaning the portion that ultimately goes to the charity—must be at least 10% of the initial fair market value of the assets contributed to the CRT at the time of its funding. This calculation is made using IRS valuation methods (typically under Section 7520) when the property is first transferred to the trust.

The rule applies to both Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). If the CRT does not meet this minimum threshold when it is established, it will not qualify as a CRT for tax purposes, and the donor may lose the associated tax benefits, such as the charitable deduction and the ability to defer capital gains taxes.

The purpose of this rule is to prevent high-payout trusts that leave little value for the charitable remainder. By ensuring that at least 10% of the trust’s value is designated for the charity from the start, the IRS aims to maintain the charitable intent of these trusts.

Why Consider a CRT?

CRTs offer multiple advantages, making them a popular choice for individuals interested in both philanthropy and financial planning:

1. Tax Efficiency: One of the most significant benefits of CRTs is their tax efficiency. By placing appreciated assets in a CRT, you can defer or eliminate capital gains taxes that would otherwise apply when those assets are sold. Additionally, the initial charitable donation provides an immediate income tax deduction. This technique can be used to offset otherwise taxable gains in the same tax year.
2. Income Generation: CRTs provide a reliable income stream for a set period or for the donor’s lifetime. This can be an effective strategy for retirees or those looking to supplement their income while maintaining a long-term charitable legacy.
3. Estate Planning Benefits: By removing assets from the donor’s estate, CRTs can help reduce potential estate taxes and simplify estate planning. This is especially beneficial for high-net-worth individuals seeking to balance family support with charitable goals. Charitable Lead Trusts, however, probably do a better job of zeroing out estate taxes.

CRTs vs. Donor-Advised Funds (DAFs)

Clients often ask how CRTs compare to other giving vehicles like Donor-Advised Funds (DAFs). While both allow for structured giving, CRTs differ in that they provide ongoing income to the donor or beneficiaries before the charitable contribution is made. In contrast, DAFs do not offer income payouts, but they do provide greater flexibility and simplicity in managing charitable gifts.

CRTs are particularly suitable for individuals with appreciated assets that they wish to convert into income without incurring significant taxes. On the other hand, DAFs are ideal for those who want a more hands-off approach to long-term charitable giving without the income component.

Considerations for Setting Up a CRT

While CRTs offer numerous benefits, it’s essential to consider a few key points:

1. Irrevocability: Once a CRT is established, it cannot be modified or revoked. This ensures that the charitable gift is secured but also means that the donor must be certain about their decision.
2. Qualified Charities: The charity receiving the remainder of the trust must be a qualified 501(c)(3) organization, such as a foundation or public charity. It’s crucial to choose an organization that aligns with your values and philanthropic goals.
3. Compliance and Administration: CRTs must comply with specific IRS rules and regulations to maintain their tax-advantaged status. Working with experienced administrators and accountants familiar with charitable rules, and annual compliance rules, ensures that the trust is properly established, administered, and compliant with tax laws.

Is a CRT Right for You?

A CRT can be an ideal choice for individuals with significant appreciated assets who want to receive income while minimizing taxes and leaving a charitable legacy. This vehicle is particularly beneficial for high-net-worth individuals looking to balance their financial and philanthropic goals in one cohesive plan.

At Bridge Law, LLP, we help you understand the intricacies of CRTs and design personalized trusts that fit their unique circumstances. Whether you’re looking to establish a CRAT, CRUT, or explore other charitable planning strategies, our team is here to guide you every step of the way.

Ready to Learn More About CRTs?

If you’re interested in maximizing your charitable impact while enjoying tax benefits and income, contact Bridge Law, LLP today. Our experienced estate planning attorneys will help you navigate the complexities of CRTs, ensuring your charitable and financial goals are aligned.

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