A charitable remainder trust, or CRT, enables donors to set aside assets for the future benefit of a charity while receiving income for life.
A CRT is tax exempt A CRT is tax-exempt. Accordingly, it is not subject to tax on its income or capital gains. As a tax-exempt trust, a CRT is an ideal method for selling an appreciated asset and avoiding the resulting tax liability while retaining an income stream for life.
A CRT may be flexible When creating a CRT, a donor has flexibility in selecting the trustee, how the investment manager is chosen, and selecting the charities that will benefit from the CRT. As a trust, a CRT must have a trustee. The donor may choose to be the trustee, or may elect to name a bank, trust company, charity, trusted professional advisor, or family friend. The donor may also reserve the right to change the trustee. The choice of trustee is important because the trustee is responsible for the administration of the trust, including the selection of the CRT’s investment advisor and administrator. A CRT donor can choose one or more charities to receive the charitable benefit. The donor may also retain the power to change his or her mind later. The charity selected may be a public charity, such as an educational institution or house of worship, donor-advised fund (DAF), or a family foundation.
A CRT must state how long the CRT will last before it must distribute to charities A qualified CRT may last for a fixed period of time of up to 20 years, or for the lives of the income beneficiaries, or for certain combinations of lives and fixed periods of time as authorized by the IRS.
A CRT may pay a fixed amount or a fixed percentage There are two permissible methods for making income payments from a CRT to the donors or other named persons. First, the payment may be a fixed amount, called an annuity amount. Second, the payment may be a fixed percentage of the CRT’s net assets, revalued annually, called a unitrust amount. Regardless of the payout structure, the payments are taxable to the income beneficiary and may be made in monthly, quarterly, semi-annual, or annual installments.
A contribution to a CRT creates an income tax deduction A donor who makes a contribution to a CRT may claim an income tax charitable deduction. However, because the charity does not receive its share immediately, the allowed deduction is only a portion of the contributed amount. Computing the charitable deduction is a detailed calculation utilizing IRS tables and is usually performed by special software.
A CRT must be properly drafted To qualify for tax benefits, the CRT agreement must comply with the tax code. For example, to protect the charitable interest, the CRT must be irrevocable, all payments to beneficiaries must follow specific guidelines, and the value of the charitable interest must exceed a minimum threshold. The IRS has published drafting guidelines and sample documents to aid attorneys in drafting a qualifying CRT. Nevertheless, wise donors hire an attorney who has experience drafting CRTs.
Many types of property may be contributed to a CRT Much of the power of a CRT lies in the fact that it can be funded with appreciated property, other than cash, and avoid an immediate income tax liability to the donor. For example, a CRT can be funded with appreciated stock, bonds, mutual funds, exchange traded funds, restricted securities, real estate in various forms, partnership interests, LLCs, C-corporations, art, collectibles, crops, and other tangible personal property.
A CRT may be used to accomplish many goals Donors commonly create CRTs:
- To sell an asset that will generate a significant tax liability;
- To convert a non-income producing asset to an income stream; or
- To achieve charitable goals and interests.
These factors are not mutually exclusive and to the extent each describes a donor, the more likely a CRT will be a satisfying solution. Because a CRT can be funded with property other than cash, a properly drafted, implemented, and administered CRT can enable donors to realize charitable goals that seem beyond their reach. For example, making a current gift of cash to endow a chair in the donors’ name at their alma mater may be infeasible, but by contributing real estate (for example) to a CRT, the donors could achieve their charitable goal, obtain an immediate income tax deduction, sell an appreciated asset in a tax-exempt environment, and create a lifetime income stream. Learn more at our website or read our CRT Handbook.