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A Charitable Remainder Trust (CRT) can be a powerful tool for individuals with highly appreciated assets who wish to give a substantial gift to a charitable organization. CRTs are separate legal entities specifically created by Congress to encourage gifts to educational, research, religious, and community support organizations. The use of these trusts has been codified in Section 664 of the Internal Revenue Code.
A CRT provides for payment of income to beneficiaries of either a specific annuity amount (Charitable Remainder Annuity Trust, or CRAT) or a unitrust amount, which is a percentage of the value of the trust each year (Charitable Remainder Unitrust, or CRUT). The annuity or unitrust amount is paid to these specific, non-charitable beneficiaries during their lifetime or for a period not to exceed twenty (20) years. The remainder of the assets in the CRT then pass to a charitable organization, as defined under Section 170(c) of the Internal Revenue Code of 1986, as amended.
How It Works:
- A donor makes an initial contribution to the trust, working with an attorney to set up the original trust document, and receives an income tax deduction for the value of the trust assets calculated to be received by the charitable organization (known as the charitable remainder beneficiary) upon the trust’s termination. This allows the donor to remove assets from his/her estate for estate tax purposes. The trust is irrevocable, and once the donor gives a gift to the trust, it cannot be undone without a petition to the court by the trustee. Some parts of the trust may be changed if the trust allows for it, such as the investments in the trust, the charitable beneficiary and the trustee.
- One or more beneficiaries receive taxable income under the terms of the trust, for a fixed period of years or for the remainder of their lifetime. The beneficiary is often the same as the donor. Providing income to beneficiaries other than the donor or the donor’s spouse may result in additional tax consequences, such as gift taxes.
- In a CRAT, the beneficiary will receive a specific dollar amount (annuity) each year. For CRATs set to expire upon the death of the income beneficiary, if there is a 5% or greater chance that there will not be assets remaining in the trust for the benefit of the charity, the trust will fail. The annuity amount must equal at least 5%, but cannot exceed 50%, of the initial value of the assets initially placed in the trust.
- In a CRUT, the income beneficiary receives a specific percentage of the trust assets each year (which will fluctuate depending upon the size of the trust assets). The unitrust amount must equal at least 5%, but cannot exceed 50%, of the trust assets as valued annually.
- The trustee carries out the terms of the trust, invests the assets of the trust and protects the interest of the income beneficiary(ies).
- Upon the death of the beneficiary(ies) or the specific term of years stated in the trust, the charitable organization receives the remaining trust assets.
As property in a CRT ultimately passes outside the family to the charitable organization, there may be a need to replace funds lost to the family with life insurance, and the creation of a wealth replacement trust should be considered.
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