A Charitable Remainder Trust (CRT) allows you to donate to a favorite charity. However, the organization does not receive your donation until after you pass. While you are still alive, the assets held in trust work for you in multiple ways.
Though a CRT delivers several benefits, we at AmeriEstate want to ensure you have the necessary information to determine whether establishing one is the right choice for you. Here’s everything you need to know about this type of trust.
What Is a Charitable Remainder Trust?
A charitable remainder trust (CRT) establishes an irrevocable trust for gifting assets to a qualified charity or charities while allowing you to draw an income. You can set up the trust to provide you with a payment for the remainder of your life or for a specific time. A CRT offers a path for cashing in on highly appreciated assets without incurring capital gains taxes from the sale and supporting causes you care about.
How Does a CRT Work?
When you create a CRT, you have significant flexibility in the assets you enter into the trust and the charitable beneficiaries you choose. However, the most beneficial are usually those that have appreciated significantly and would result in capital gains if you were to sell them, including:
- Stocks
- Real estate
- Public and alternative securities
- Cryptocurrency
- Art
Upon establishing this irrevocable trust, the trustee can sell property and other non-cash assets, potentially reinvesting them into income-generating assets.
Trustee
If you name yourself the trustee of a CRT, you maintain complete control of asset management. You can also appoint someone else as the sole trustee. Furthermore, it’s entirely possible to have more than one trustee. Many couples choose to manage the trust jointly.
Whether you are the trustee, you have the right to name beneficiaries. You can add beneficiaries or change them as you see fit. However, since the trust is irrevocable, you can’t dissolve it or withdraw your donation.
Income Beneficiaries
CRTs have two types of beneficiaries. The first is the income beneficiary. Most donors establish the trust as an additional income stream for themselves. However, you can name someone else as the beneficiary.
If you wish to split the income between yourself and others, you can do so. You can determine whether you want the other recipients to be concurrent or subsequent beneficiaries. Additionally, you have that option if you choose not to draw an income from the CRT yourself but would like to divvy it up between multiple other income beneficiaries (your children, for instance).
Naming anyone other than you and your spouse as an income recipient has tax implications. When you identify a concurrent beneficiary other than your spouse, the Internal Revenue Service (IRS) views the income as a gift, and the recipients must pay a gift tax. The IRS also levies a gift or estate tax on subsequent beneficiaries. One challenge to these strategies is ensuring the charitable donation meets the IRS’s required amount, which we’ll discuss below.
Charity Beneficiaries
The second type of CRT beneficiary is the donation recipient. You can name as many charities as you wish and determine how much of the donation each receives. However, the charities you choose must be qualified U.S. charities.
When you pass, the assets left in the trust go to the named charities in the proportions you stipulate. You must ensure that the assets that remain at the time of your death equal at least 10% of the initial net asset value of all assets you place in the trust. Once you add an asset, you can’t remove it.
How Do Income Payments Work?
CRTs must pay income to at least one beneficiary. However, there is some flexibility in how you set up your payments. You can defer payments until a future date or begin collecting them immediately. Many people use a CRT as an additional retirement income, delaying payments until they reach retirement age.
There are also two different types of charitable remainder trusts:
- Charitable Remainder Annuity Trust (CRAT): A CRAT distributes income based on a specified dollar amount. You determine how much you wish to receive annually, but it must be between 5% and 50% of the value of assets held in the trust when you establish it.
- Charitable Remainder Unitrust (CRU): Rather than paying a dollar amount, CRUs pay a percentage of the value of assets held in trust. The rate also must generally be between 5% and 50%.
Both trusts allow you (or your beneficiaries) to receive payments while you are alive or for your subsequent income beneficiaries to receive them after you pass. You can use a CRT calculator to estimate income payments for each type, along with tax savings and obligations.
What Are the Tax Responsibilities and Benefits?
Other than offering an opportunity to support causes and organizations you believe in, the primary benefit of a CRT is the tax savings you receive.
Capital Gains Taxes
Assets are removed from your estate once you establish a CRT. If you sell an asset, such as a real estate property, you won’t pay capital gains taxes on the profits. Instead, the trust receives the entire proceeds. However, if your income payments from the trust exceed ordinary income levels, you may incur capital gains taxes on that income.
Estate Taxes
If you name your children as income beneficiaries, they may have to pay an estate or gift tax on the income they receive. However, your chosen charities will not pay estate taxes on the amount they receive.
Charitable Donations Tax Deduction
You can take a partial tax deduction on your income tax for the remainder interest value each year. The higher your income from the trust is, the lower your charitable deduction.
Income Tax Obligations
Any non-charitable beneficiary is responsible for reporting income distributions from a charitable remainder trust on a Schedule K-1 form. These payments are generally taxable as ordinary income.
Who Can Help Set Up a Charitable Remainder Trust?
AmeriEstate works with individuals like you who seek assistance with estate planning, including setting up a charitable remainder trust. We offer free consultations and affordable rates because we believe everyone should have access to personalized service from industry experts. Contact us today and join the more than 40,000 families who’ve benefited from AmeriEstate’s services.
Sources:
https://www.irs.gov/charities-non-profits/charitable-remainder-trusts
https://www.irs.gov/forms-pubs/about-form-1041