What are Charitable Remainder Trusts?
Charitable Remainder Trusts may be a good strategy to support a philanthropic cause you’re passionate about, while also establishing a financial legacy for your family and reducing a tax burden.
John Warneke, CEPA®, CTFA
Charitable Remainder Trusts (CRT) are popular tools that can be part of an overall wealth plan that benefits the benefactor and charity. They allow individuals to support a charitable cause important to them and receive potential tax benefits and income during their lifetime. We’ll explore how CRTs work, their benefits, and considerations for setting one up.
How do charitable remainder trusts work?
A CRT is a type of irrevocable trust that allows a donor to contribute assets while retaining the right to receive an income stream from those assets for a specified period. After this period, the remaining assets in the trust are transferred to one or more designated charitable organizations.
There are two basic types of CRTs, differentiated based on how the noncharitable beneficiary receives payments.
Charitable Remainder Annuity Trust (CRAT):
- A CRAT pays a fixed annuity amount to the donor or designated noncharitable beneficiary each year.
- The payments continue for a specific term of up to 20 years or the life of one or more beneficiaries.
- The payment amount is determined at the establishment of the trust, cannot be less than 5% or higher than 50% of the trust assets, and does not change during the term of the trust.
Charitable Remainder Unitrust (CRUT):
- A CRUT pays a variable amount based on a fixed percentage that fluctuates with the trust's value. This means income can increase or decrease based on investment performance.
- The payments continue for a specific term of up to 20 years or the life of one or more beneficiaries.
- Beneficiaries receive a percentage of the trust’s assets, recalculated annually.
In addition to those above, there are subvarieties of CRTs, such as NiCRUTS, NimCRUTs, Flip-CRUTS, among others. Because of the options available, qualified legal and financial guidance should be sought to determine what’s best for your unique situation.
How CRTs Work
- Creation of the Trust: The donor establishes the CRT, transferring appreciated assets such as stocks, real estate, or other property into the trust.
- Income Distribution: The trust pays income to the donor or noncharitable beneficiaries.
o It’s important to note that the income payments received by the donor or other noncharitable beneficiary from a CRT are taxable and are reported on a Schedule K-1 form.
- Charitable Distribution: After the term ends, the remaining assets in the trust are distributed to one or more designated charities.
"Many of our clients have causes which are important to them and charitable remainder trusts can be a tool to fulfill their goal, but CRTs shouldn’t be the primary driver of someone’s charitable strategy."
John Warneke
CEPA®, CTFA
Tax Benefits
- Immediate Charitable Deduction: Donors may receive a partial charitable deduction on their income taxes for the present value of the charity’s remainder interest in the trust. This is based on the trust term, projected payments to the noncharitable beneficiary, and the IRA 7520 rate.
- Avoidance of Capital Gains Tax: If appreciated assets are transferred into the CRT, the trust does not incur capital gains taxes when those assets are sold. This allows more funds to be invested or distributed.
- Estate Tax Benefits: The assets in the CRT are generally not included in the donor’s taxable estate, potentially reducing estate taxes.
Advantages of Charitable Remainder Trusts
- Income Stream: CRTs provide an income stream for the donor or noncharitable beneficiaries, which can be especially beneficial in retirement.
- Philanthropic Goals: CRTs allow donors to support their favorite charities in a structured way, aligning their financial planning with their philanthropic objectives.
- Diversification of Assets: By placing assets in a CRT, donors can diversify their holdings, potentially enhancing their financial situation.
Considerations and Potential Drawbacks
- Irrevocability: Once established, a CRT cannot be altered or dissolved without significant consequences, which means careful planning is essential.
- Costs and Complexity: Setting up and maintaining a CRT can involve legal and administrative costs, and the complexity may require the assistance of financial and legal professionals.
- Limited Control: Donors relinquish control over the assets placed in the trust, which can be a concern for those who prefer to maintain direct oversight.
Getting the advice you may need
Charitable Remainder Trusts will likely continue to be a popular strategy for charitable giving. It can be a powerful tool for combining philanthropic goals with your broader financial plan. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a
Huntington Private Bank Office near you.
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