Charitable remainder trusts (CRTs) can be an effective means of managing your wealth and achieving your charitable giving goals. Let’s go over the basics of charitable remainder trusts and their potential benefits.
What is a charitable remainder trust, and how does it work?
A charitable remainder trust (CRT) is a type of irrevocable trust that allows donors to donate to charity while also receiving certain tax benefits. The grantor of a charitable remainder trust makes contributions to the trust in the form of property, cash, or other assets. Either the grantor themselves or another designated beneficiary then receives distributions from the trust for life or for a set period of time (no longer than 20 years). After that time, the remainder of the trust’s assets is donated to one or more charitable organizations of the grantor’s choosing—hence the name “charitable remainder trust.”
Types of CRTs
There are two main types of charitable remainder trusts:
- Charitable Remainder Annuity Trust (CRAT): pays a fixed dollar amount each year and does not allow additional contributions.
- Charitable Remainder Unitrust (CRUT): pays a fixed percentage based on the trust balance (which is revalued annually) and allows for ongoing contributions.
Benefits of Charitable Remainder Trusts
- Predictable income stream: A CRT provides a regular and reliable income stream to the non-charitable beneficiaries for the lifetime of the trust.
- Immediate partial income tax deduction: A CRT provides a partial income tax deduction to the donor in the year the trust is created and funded. The amount of the deduction is limited to the value of the remainder interest that will go to charity. This amount will vary based on factors such as the payout rate of the trust and the ages of the noncharitable beneficiaries. The deduction is also subject to AGI limits and other limitations under the tax code.
- Tax-free growth: Because the CRT is a tax-exempt entity, assets within the trust grow tax-free.
- Deferred capital gains tax: CRTs avoid immediate capital gains tax on the sale of assets transferred to the trust.
- Reduced estate taxes: Since a CRT is an irrevocable trust, the assets within the trust are removed from the grantor’s taxable estate, thereby reducing the grantor’s estate tax liability.
- Asset protection: The assets in a CRT are protected from creditors and lawsuits.
Other Things to Know
- Since a CRT is an irrevocable trust, the grantor relinquishes control of the trust’s assets to the trustee. Any assets that go into the trust cannot be returned.
- The annual annuity distributed from the trust must be at least 5%, but no more than 50%, of the initial fair market value of the trust’s assets.
- The portion donated to charity must be at least 10% of the initial value of the assets in the trust.
- Based on how the trust is structured, the grantor or other beneficiaries may receive income from the trust annually, semi-annually, quarterly, or monthly.
- Payments from a charitable remainder trust are taxable as income and must be reported to the IRS. CRTs must file Form 5227, Split-Interest Trust Information Return
Partner with RBT for Your Estate Planning
RBT’s Trust, Estate, and Gift team is here to help you establish and manage your charitable remainder trust. Our experienced professionals handle your trust’s accounting, tax compliance, and financial administration, so you can have the peace of mind that your assets are protected. Call us today and find out how we can be Remarkably Better Together.