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This is Part II of a two-part series about Charitable Estate Planning – Leaving Your Legacy to Charity & Loved Ones; not to Uncle Sam. This article discusses a popular and effective tool for preserving your estate for your loved ones and charities–the Charitable Remainder Trust (CRT).
The Charitable Remainder Trust (‘CRT’) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you, your spouse, or you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the ‘remainder interest’) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership to the trust of assets that otherwise would be counted for estate tax purposes.
A Charitable Remainder Trust can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse there will be gift tax consequences to the transfer to the CRT.
Charitable Remainder Trusts are tax-exempt entities. In other words, when a Charitable Remainder Trust sells an asset it pays no income tax on the gain in that asset. Therefore, after a sale the trust has more available to invest than if the asset were sold outside of the Charitable Remainder Trust and subject to tax. Accordingly, Charitable Remainder trusts are particularly suited for highly appreciated assets, such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the Charitable Remainder Trust does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject to tax.
There are several types of Charitable Remainder Trusts. For example, the Charitable Remainder Annuity Trust pays a fixed dollar amount (for example, $80,000 per year) to the income recipient at least annually. Another type of CRT, the Charitable Remainder Unitrust, pays a fixed percentage of the value of the trust assets each year to the income recipient (for example, 8% of the value as of the preceding January 1). A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT and have the trust convert to a Charitable Remainder Unitrust upon the sale or happening of a specified event, for example upon reaching a specified retirement age.
At the end of the term of a Charitable Remainder Trust, the remainder interest passes to qualified charities as defined under the Internal Revenue Code. Generally, any charity that has received tax-exempt status through an IRS determination qualifies, but this is not always the case. It is possible for you to name a private foundation established by you as the charitable beneficiary.