|Charitable remainder trusts or “CRTs” are not as commonly utilized as in years past. Declining income tax rates, an increasing federal estate tax exemption, and decreased impact of the charitable donation tax deduction have combined to rob the CRT of some of its effectiveness. However, for philanthropic-minded donors who own the right kind of assets, a CRT can be exactly the right tool to defer or defeat capital gain or income tax, and at the same time create a charitable legacy for the community that sets an example for the family’s next generation.|
|Tom and Ann are retired and want to make an impactful gift to their community foundation. While they have liquid assets that could be used to make such a gift, they look to these funds as security for their retirement. Tom also has a sizable retirement account from his job, which includes pre-tax investments which are now taxed upon withdrawal. How can they achieve their philanthropic goal but still have security during their retirement? A CRT is the answer.|
In a CRT, a donor transfers an asset into trust for the benefit of a charity. The trustee holds or invests the asset and pays back to the donor a stream of payments for a term of years, after which the remainder of the trust corpus is donated to the charity. The donor is taxed on the payments returned over the term but receives a charitable donation for the eventual disposition of the remainder. And most importantly, the charitable trust does not recognize taxable gain upon disposition of the asset donated to the trust. Therefore, the donation of an asset subject to high tax impact, for example tax-deferred retirement investments of a highly-appreciated capital asset, will not be subjected to tax because of the trust’s charitable character. A CRT can be truly the best of both worlds – a vehicle for tax deferral for the donor, combined with charitable benefit to the donor and the charity.
Two Types of CRTs
Section 664 of the IRS Code lays out the benefits of various types of CRTs. A charitable remainder annuity trust (CRAT) will provide an annual annuity payment to the donor for a fixed term of not more than twenty (20) years, in an amount between five (5%) and fifty (50%) percent of the assets contributed. The asset value is determined at the time of their contribution.
A charitable remainder unitrust (CRUT) provides a similar stream of annual payments for not more than twenty years, in the same range of five to fifty percent of the donated assets. The value of a CRUT payment, however, is determined annually, so the annual payment may vary from year to year depending on the investment performance of the trust.
The value of the annual payment stream to the donor is affected by the number and amount of annual payments the trust will make, as well as the performance of the trust’s investments, and how that return compares to federal interest rate returns. A short term trust will provide larger payments and provide a better return, but will provide less deferral of taxation than a long term CRT with a lower payment rate.
|Carol and Lyndon are farmers who are winding up their business and retiring. The sale of their equipment, all fully depreciated, as well as the grain in their bins from last year’s bumper crop, will create an income tax hit of over half a million dollars if all of these assets are sold this year. They would prefer to defer and lessen the tax impact, and also benefit the country church which they’ve attended for years. A CRT is the answer.|
|The Many Benefits of a CRT |
Charitable remainder trusts offer numerous benefits. First, the donor will receive a charitable deduction for the amount of the remainder of the trust that eventually passes to the charity. Second, the stream of payments provides a deferral of taxation on those assets, thus allowing tax-free accrual in the interim. But most importantly, using a CRT allows the donor to utilize the charity’s exemption from income taxation. In exchange for donating a portion of the property to charity, the donor can defer the tax on the realization of the asset, thereby allowing the donor’s stream of payments to be larger. And the satisfaction of supporting good charitable work and making a difference in the community is rewarding for the donor and the donor’s family.
|James wants his million-dollar 401k to pass to his children on his death, but is worried that access to too much money will not be good for them, or that the inherited funds will be dissipated. He had planned to provide the funds to them in a beneficiaries’ Stretch-IRA conduit trust, but recent tax law changes have limited such accounts to ten years, and he would like a longer period. A CRT is the answer.|
|Providing Personal and Community Benefit |
CRTs have become part of a discussion of deferral of access to beneficiary IRAs since the 2019 adoption of the SECURE Act. Now that SECURE has eliminated or limited the use of stretch IRAs to less than ten years, some planners recommend investing an IRA into a CRT with a twenty-year term, thereby doubling the tax-deferral period of payments made to the IRA’s owner or beneficiaries. Again, such use of a CRT combines the benefits of addressing tax concerns while also meeting charitable donative intent.
CRTs are an admirable means to combine tax deferral with charitable intent to provide a long-term tax benefit to the donor, defeat income or capital gains tax for certain kinds of donated assets, and provide benefit to charitable causes in the community. Donors with a highly appreciated asset like real estate or a tax-deferred retirement account obtain special benefit from the use of CRTs. In providing both personal and community benefit, CRTs are truly the best of both worlds.
|Attorney John Flinchbaugh|
John provides counsel in all aspects of estate and gift tax planning, and income tax matters involving trusts and estates. He assists fiduciaries with administrative duties, such as preparing and submitting accountings and transferring assets. He may be reached directly at (717) 718-7122 or by email: [email protected].
John Flinchbaugh Bio
|Attorney Tim Bupp|
Tim is a Certified Elder and Special Needs Law Attorney (CELA) and the Chair of the Estate Planning Department of CGA Law Firm. He may be reached directly at (717) 887-7504 or by email: [email protected].
Tim Bupp Bio
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