Charitable Remainder Trusts
Provide Income to Individuals First and Then Provide Income to Charity Later
A charitable remainder trust (CRT) is a special vehicle approved by the Internal Revenue Service that allows individuals to make a charitable gift, receive charitable deductions, and yet receive the income from the gift for life (or lives) or for a term of years. After the selected trust period is over, the assets remaining in the CRT establish a permanent endowment for the benefit of ministries selected by the donor. Because the assets eventually go to a charity, special tax benefits are available at the time of the gift by the donor.
Tax benefits available for establishing CRTs include:
- Income tax deduction for a portion of the gift;
- Bypass of capital gains tax upon the sale of long-term appreciated assets;
- Possible estate and gift-tax savings
Other benefits may include:
- Increased income from a non- or poor income-producing asset;
- Financial support for a family member;
- Professional money management;
- Tax-free earnings inside the trust;
- A way to provide significant and permanent future support for Christian ministries.
Questions and Answers on Charitable Remainder Trusts
What are the types of charitable remainder trusts?
Charitable Remainder Unitrust (CRUT)
A CRUT pays income to individuals based on a set percentage that is multiplied by the market value of the trust principal as revalued on January 1 of each year. As the principal value changes due to the investment, so does the payment. For example, if the trust is valued at $100,000 on January 1 and the payout percentage is 6%, the beneficiary would receive $6,000 for the year. If the trust had net earnings of $8,000 during the year, then the extra $2,000 of earnings would be added to the principal. The next year, the payment would be based on 6% times $102,000. Because the trust is revalued each year, additional contributions to CRUTs are allowed. Other CRUT options are available.
Charitable Remainder Annuity Trust (CRAT)
A CRAT pays a fixed income based on a set percentage that is multiplied by the value of the gift going into the trust. The payment remains the same for the duration of the trust, regardless of the investment returns. Because it makes a fixed payment, CRATs cannot accept future contributions. For example, if the trust is funded with $100,000 and the payout percentage is 6%, then the trust would pay $6,000 each year and would not fluctuate.
How are my trust payments taxed to me?
Trust payments are taxable to the recipient under what’s called a “four-tier” system. Generally speaking, the payments are taxable according to how they are earned inside the trust and in the following order: First, earnings of interest, dividends and rent are distributed. Second, available capital gains are distributed. Third, available tax-exempt income is distributed. And fourth, available tax-free return of principal is distributed.
What assets should be used to fund a charitable remainder trust (CRT)?
Generally, when funding a CRT while living, the tax benefits are best when funded with long-term appreciated assets such as stock and real estate. This is because the trust can accept such assets without having to pay the deferred income tax. Retirement accounts and other deferred income assets are good when funding a CRT at death for the benefit of other individuals. The deferred income is forgiven when created and funded at death, but not while living.
Annuity trusts need to be funded with cash, commonly traded stocks or other assets that can be readily sold. This is because the trust is required to make the payment to beneficiaries regardless of earnings. Unsold real estate often does not produce income.
Unitrusts are more flexible because they can be designed to not have to make income distributions while the trust assets are non-income producing. Thus, they can accept real estate and other hard-to-sell assets.
Cash is the easiest and quickest asset to use to fund either type of CRT.
Are there limits to how much income tax deduction can be taken?
First, an individual must itemize their deductions to take advantage of any available charitable deduction. Then, generally speaking, gifts of long-term assets are limited to 30% of adjusted gross income in the year of the gift and the unused portion can be carried over for up to 5 more years. Gifts of cash assets are limited to 50% of adjusted gross income in the year of the gift and have the same carry-over provision.
Someone said it was possible to “Give It Twice” by using a CRT. How does that work?
There are different options but a simple one is to use a CRT in the Last Will and Testament to pass all or a portion of the estate to family. After the family receives the full value of the estate gift over time through the trust, a permanent endowment is funded with the trust remainder. Then the endowment pays an ongoing stream of income to the designated charities, thereby giving the gift twice---once to family and then to the Lord’s work.
Are there estate or gift tax concerns when a charitable remainder trust (CRT) pays to someone other than the donor and his/her spouse?
Yes but a portion of the gift or estate tax can be offset by the available tax deductions. Annual exclusions may also be available when a (CRT) is funded while living and when the trust begins paying immediately to the income beneficiaries. Because this can be complicated and is a changing area of tax law, always obtain professional tax and legal advise before creating a CRT.