What is a charitable remainder trust (CRT)?
What is a charitable remainder trust (CRT)?
A charitable remainder trust is a type of irrevocable trust that allows you to receive an up-front charitable deduction, sell a low basis asset/investment without incurring an immediate tax on that sale, create an income stream for yourself or another beneficiary for up to 20 years or the lifetime of the beneficiary, and ultimately gift the remainder interest to a charity you care about.
How does a charitable remainder trust work?
You transfer an appreciated asset into the CRT. Based on the duration of the trust (lifetime of beneficiary or fixed number of years) and based on the present value of the annuity payments (determined by the section 7520 rate), you will receive an up front income tax deduction on that transfer to the CRT.
You’ll need your advisor or software to calculate what that deduction value will be and you’ll also need to work with your CPA to determine how that will actually impact your overall tax situation depending your expected taxable income. If you don’t have enough income in the year of making the gift to the CRT to offset the tax deduction (because there are limitations on how much you can deduct as a percent of your income each year for charitable purposes). If you have an unused charitable deduction, you can generally carry forward that deduction and apply it to your future tax returns for up to five years or once the deduction has been fully utilized, whichever occurs first.
The trustee can then subsequently sell the asset/investment that was transferred to the trust and the sale of that asset is tax exempt while the proceeds are held in the charitable remainder trust.
Each year the trust will pay out a certain amount (the annuity), which cannot be less than 5% and no more than 50% of the initial value of asset transferred to the trust. (The actuarial value calculations also must show at least 10% of the initial asset value will be given to a qualified charity at the end of the trust’s term).
It’s important to note that the income distributed out of the trust to the beneficiary will be subject to income taxes. For this reason, a CRT doesn’t permanently eliminate the tax on the sale of an asset but instead defers that tax until the ordinary income, capital gain, and/or other income is distributed out to the beneficiary (as would be shown on a schedule k-1).
Who should consider creating a charitable remainder trust?
If you are charitably-inclined and own a highly appreciated asset, then a charitable remainder trust may make sense for you or your family.
You’ll get the benefit of knowing you donated to a charity, an immediate tax deduction (instead of a huge tax bill on the sale of asset), create an income stream for the life of the beneficiary or for up to 20 years, and allow the assets held in trust to continue to grow tax exempt until they are distributed out to the beneficiary.
If you’d like to learn more about charitable remainder trusts, or if you’d like me to review or create for you, click the link below to schedule a call with me today - I’m always happy to help!
