Charitable Remainder Trusts (CRT): Pros and Cons?

Charitable Remainder TrustsBy Tristan Ellis, Staff Writer

Americans give generously

To those in need, whether it’s to rebuild communities touched by natural disaster, to support environmental causes or to fund other worthy causes we support. When we give, most of us give from the heart and don’t always consider the financial implications. However, giving by way of a Charitable Remainder Trust not only helps support a cause you believe in, but reduces your own tax bill and provides you with income.

A Charitable Remainder Trust

(CRT) is a popular estate-planning option. Since 1969, this type of trust has enabled charities and not-for-profits to generate more revenue for their organization. It also offers you the opportunity to give an appreciated property or security to a charitable cause while retaining an interest income for your and your family. It’s a tool that also enables you to give more to a worthy charity while allowing you to reduce estate taxes, eliminate capital gains and claim an income tax deduction.

A CRT is an irrevocable trust that maintains two sets of beneficiaries: income beneficiaries (you and your spouse) and the charity of your choice. Once your gift is put in charitable trust, you may qualify for an income tax deduction. The tax deduction is based on the present value of the remainder interest to the charity. Neither you nor the charity owes taxes on this transfer or upon the appreciation of the asset, thus avoiding all capital gains taxes. Usually, the trust sells your donated asset and reinvests the proceeds in an income-producing investment. You then receive this income in return for gifting the asset to the charity.

This income can be received as either a fixed amount or a percentage of the value of the trust. Your income will vary based on the current value of the trust, but some CRTs also offer a “make-up” clause. The make-up clause allows one year’s shortfall to be added to the following year’s distribution. Should the asset appreciate, although you can not take advantage of future growth or higher earnings, the trust provides a consistent income.

A CRT is an irrevocable instrument.

The charity will eventually assume ownership, even if it does not receive any benefit for several decades. Until the charity assumes ownership, the trustee you appoint is in charge of controlling the assets in the trust. It is important to clearly state your intentions in your trust document and choose a trustee who both understands financial matters and will carry out your intentions.

A charitable remainder trust can allow you to make a substantial gift to charity, avoid certain taxes, and provide regular income for you and your family. However, the use of any trust involves a complicated set of tax rules and regulations. It would be wise to consult an experienced estate-planning professional for advice and assistance in planning your CRT.