A Charitable Remainder Trust or a CRT is an agreement between you and a trustee to hold assets for a term. The term may be for the lifetime of you, your spouse and/or other beneficiaries or for a set period of time not to exceed 20 years.
During the term of the CRT, the trustee will distribute a sum certain (a charitable remainder annuity trust or a CRAT) or a fixed percentage (5%-50%) of the trust assets (a charitable remainder unitrust or a CRUT) determined by you to a non-charitable beneficiary (the “income recipient”) determined by you. At the end of the term, the CRT’s remaining assets will be distributed to the charity or charities that you have selected.
Benefits of a CRT include:
- Reduction in estate size. The gift to a CRT immediately is removed from your estate thus creating estate tax savings. As long as you and/or your spouse are the income recipients, no gift taxes are due.
- Income tax deduction. You receive a charitable income tax deduction based on the amount of money expected to remain in the trust at the end of the term. The value of the income tax deduction is based on the (i) income amount (higher income amount and/or longer income period means less for the charity and less deduction); (ii) the age of the income recipient (older recipient results in larger deductions); and (iii) the Internal Revenue Service interest rates in effect at time of the gift. Note that the law provides that at a minimum, 10% of the value of the property initially transferred into the trust must pass to the charity to qualify as a CRT.
- Potentially more living income. Your cash flow may be higher due to the income tax deduction and the income interest from the CRT. Many grantors gift highly appreciated and non-income producing property to a CRT. Because it is a charitable trust, the CRT can sell the asset without capital gains tax. The proceeds then are reinvested into income producing property to pay the income interest. In this way, a CRT may be used to unlock income from a non-income producing asset without having to lose asset value because of capital gains.
- Significant gift to charities. Any assets remaining in the CRT at termination of the term pass to the specified charities. If the CRT is able to earn a growth rate greater than the amount due to the income recipient, the trust assets will grow over time. The potential windfall for charities may be tremendous. In fact, many large charities have special departments for helping donors create a CRT.
- Increased net to heirs. Many grantors use a portion of the CRT income to purchase life insurance. This allows the grantor to offset estate taxes on his or her other assets and increase the net amount distributable to heirs.
Severable derivations on the standard CRT exist. Some of the more popular ones are:
- NIM-CRUT – Net Income With Make-up Charitable Remainder Unitrust where the Trustee distributes the lesser of the fixed percentage amount and the CRT’s actual net income. Any deficiencies (i.e., where net income is less than the fixed percentage) are made up in later years when the actual income exceeds the fixed percentage.
FLIP-CRUT – where a NIM-CRUT converts to a standard CRT on a triggering event such as the sale of unmarketable assets used to fund the CRT.