By Peter Mastrantuono
Individuals are often cautioned that if something sounds too good to be true, then it probably is. Charitable Remainder Trusts may be the exception to that rule.
Charitable Remainder Trusts (CRTs) can be a valuable planning tool for high net worth individuals, providing the benefits of capital gains deferment, income tax deductions, potentially higher income and the opportunity to diversify assets.
What is a Charitable Remainder Trust?
A CRT is a trust that pays out a fixed percentage of its assets to one or more income beneficiaries (often the donor and his or her spouse) for their lifetimes. Upon the death of the income beneficiaries, the trust terminates, and the remaining assets (the “remainder”) are distributed to the named charities.
The remainder, because it can be assigned a current value, generates a charitable income tax deduction for the year in which the donation is made, subject to the same adjusted gross income limitations as outright gifts to charitable organizations. The size of the tax deduction will depend upon the type of trust, terms of the trust, the projected income payments and IRS interest rates used to assume the growth rate of trust assets.
There are two basic forms of CRT: a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder UniTrust (CRUT).
While the CRAT and CRUT are generally similar, they differ in two important respects. One is that the payments from a CRAT are based on a fixed percentage of the initial trust assets, while the CRUT pays a fixed percentage of the current value of the trust assets.
The second difference is that additional contributions are not permitted in a CRAT but allowed in a CRUT. Contributions are irrevocable and require that income be paid out.
CRT Planning Considerations
Contributions may be made in cash or other property (e.g., publicly traded stocks, closely held stock, not S-Corp stock, real estate, and other complex assets).
One of the more valuable planning techniques is to donate highly appreciated stock to a CRT, which allows the donor to avoid paying capital gains taxes since the shares are sold inside the tax-exempt CRT. This strategy is a tax-efficient way to make charitable donations, while reducing the risk of holding a highly concentrated stock position.
CRTs can also satisfy an individual’s need to maintain a stream of income in retirement and reduce the size of an estate.
The disadvantages of a CRT include the irrevocable loss of control over the donated assets, the costs to establish and administer the trust and the risk that unrelated business taxable income could end a CRT’s tax-exempt status.
It’s Complicated…
While CRTs can be a highly tax-efficient way to meet legacy and retirement income goals, they can be extremely complicated, especially when factoring in a variety of considerations, such as making a private foundation as the remainder beneficiary, how to protect income payments in the event of premature death, the impact gifting has on retirement goals and post-mortem planning opportunities.
CRT planning should always be done in concert with a qualified estate planning attorney to explain the nuances and complexities of CRTs and create the required legal documents.
Your financial advisor plays an important role here as well, helping you assess the impact a CRT donation has on your financial plan and managing the CRT assets responsibly.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
