Charitable Remainder Trusts: A Strategic Tool for Giving and Receiving

A Charitable Remainder Trust is a type of split-interest trust. The trust splits the benefits of the trust between two parties: the income beneficiary, usually the donor or their designated individuals, and the charitable remainder beneficiary, a qualified nonprofit organization. The trust pays income to the income beneficiary for a specified period – either for life or up to 20 years. After the term ends, the remaining assets in the trust are transferred to the designated charity.

There are two main types of CRTs:

• Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount annually, regardless of the trust’s investment performance.
• Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s value, recalculated annually. This allows for potential growth in income if the trust assets appreciate.

There are three key advantages to creating a charitable remainder trust.

Tax Advantages:

• Income Tax Deduction: Donors receive an immediate charitable income tax deduction based on the present value of the remainder interest that will eventually go to charity.
• Capital Gains Tax Deferral: When appreciated assets such as stocks or real estate are transferred into the trust and sold by the trust, capital gains taxes are deferred, allowing the full value of the asset to be reinvested.
• Estate Tax Reduction: Assets placed in a CRT are removed from the donor’s estate, potentially reducing estate taxes.
• Income Stream: CRTs provide a steady income stream for the donor or other beneficiaries. This can be especially useful for retirement planning or providing for family members.
• Philanthropic Impact: At the end of the trust term, the remaining assets can support a charitable organization, allowing donors to leave a meaningful legacy.

Here is an example of how a CRT could work for you: Imagine you own stock worth $1 million that was originally purchased for $100,000. If sold outright, you would face significant capital gains taxes. Instead, you can transfer the stock into a CRUT. The trust would sell the stock tax-free and reinvest the full $1 million. You will receive annual payments based on a percentage of the trust’s value and a charitable deduction in the year of the gift. After your lifetime, the remaining assets go to a chosen charity.

While CRTs offer many benefits, they are not suitable for everyone. Key considerations include:

• Irrevocability: Once assets are transferred into a CRT, the decision cannot be undone.
• Complexity and Costs: CRTs require legal and financial expertise to set up and administer, which can be costly.
• Minimum Payout Requirements: The IRS mandates that the annual payout must be at least 5% but not more than 50% of the trust’s assets.
• Charitable Remainder Requirement: At least 10% of the initial value of the trust must be projected to go to charity.

Knowing the limitations of a CRTs, these are ideal for individuals interested in CRTs:

• Own highly appreciated assets.
• Seek a tax-efficient way to generate income.
• Have philanthropic goals.
• Reduce estate taxes.

They are commonly used by retirees, business owners and investors looking to balance personal financial goals with charitable giving.

Charitable Remainder Trusts offer a unique blend of financial planning and philanthropy. By converting appreciated assets into income while supporting charitable causes, CRTs provide a win-win solution for donors and nonprofits alike. However, because of their complexity, it’s essential to consult with financial advisors, estate planners and legal professionals to determine if a CRT aligns with your overall goals. QCBN

By Lisa Sahady

The information contained in this article is not intended as legal advice. Please contact an appropriate professional to answer questions regarding the creation of a will. For more information on community giving, visit azfoundation.org or call ACF of Yavapai County at 928-583-7815.

Lisa Sahady is the regional director ACF of Yavapai County.