A CHARITABLE REMAINDER TRUST CAN PROVIDE A MULTITUDE OF BENEFITS

 

If you’re charitably inclined but concerned about having sufficient income to meet your needs, a charitable remainder trust (CRT) may be the answer. A CRT allows you to support a favorite charity while potentially boosting your cash flow, shrinking the size of your taxable estate, reducing or deferring income taxes, and enjoying investment planning advantages.

How does a CRT work?

You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

When you fund the trust, you can claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — known as a charitable remainder unitrust (CRUT).

Generally, CRUTs are preferable for two reasons. First, the annual revaluation of the trust assets allows payouts to increase if the trust assets grow, which can allow your income stream to keep up with inflation. Second, you can make additional contributions to CRUTs, but not to CRATs.

The fixed percentage — called the unitrust amount — can range from 5% to 50%. A higher rate increases the income stream, but it also reduces the value of the remainder interest and, therefore, the charitable deduction. Also, to pass muster with the IRS, the present value of the remainder interest must be at least 10% of the initial value of the trust assets.

The determination of whether the remainder interest meets the 10% requirement is made at the time the assets are transferred — it’s an actuarial calculation based on the trust’s terms. If the ultimate distribution to charity is less than 10% of the amount transferred, there’s no adverse tax impact related to the contribution.

As an alternative, you might want to consider a Charitable Gift Annuity (CGA):

How It Works

  • You transfer cash or securities to a qualified charity. Different charities have different minimum requirements.
  • The charity pays you, yourself and a spouse, or any two beneficiaries you name, fixed payment for life.
  • Beneficiaries are recommended to be at least 60 years of age at the time of the gift.
  • The remaining balance passes to the charity when the contract ends.

The Benefits of a CGA

  • Receive dependable, cash-flow for life, regardless of fluctuations in the market.
  • In many cases, receive payments at a rate higher than the interest you are currently receiving on the cash or securities used to establish the CGA.
  • Receive an immediate income tax deduction for a portion of your gift.
  • A portion of your annuity payment will be tax-free.
  • If you are you a younger donor, you might consider a deferred gift annuity.

Handle with care

If the estate tax is repealed as part of tax reform as has been proposed, these tools would become less beneficial from an estate tax perspective. But they could still help the charitably inclined achieve their goals. CRTs require careful planning and solid investment guidance to ensure that they meet your needs. CGAs are usually a bit less complex  However, before taking action, discuss your options with us.