Charitable Planning
The Charitable Remainder Trust (CRT) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you, your spouse, or both you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the remainder interest) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership of assets to the trust that would otherwise be counted for estate tax purposes.
A CRT can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse there will be gift tax consequences for the transfer to the CRT.

CRTs are tax-exempt entities. In other words, when a CRT sells an asset it pays no income tax on the gain in that asset. Therefore, after a sale the trust has more available to invest than if the asset were sold outside of the CRT and subject to tax. Accordingly, CRTs are particularly suited for highly appreciated assets, such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the CRT does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject for tax.

There are several types of Charitable Remainder Trusts:

  • A Charitable Remainder Annuity Trust pays a fixed dollar amount to the income recipient at least annually. For example, $80,000 per year.
  • A Charitable Remainder Uni-trust pays a fixed percentage of the value of the trust assets each year to the income recipient. For example, 8% of the value as of the preceding January 1.
  • A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT and have the trust convert to a Charitable Remainder Uni-trust upon the sale or happening of a specified event. For example, upon reaching a specified retirement age.

At the end of the term of a CRT, the remainder interest passes to qualified charities as defined under the Internal Revenue Code. Generally, any charity that has received tax-exempt status through an IRS determination qualifies, but this is not always the case. It is possible for you to name a private foundation established by you as the charitable beneficiary.