A charitable remainder trust is a tax-exempt irrevocable trust intended to reduce taxable income by first dispersing income to the trust beneficiaries for a specified period of time and then donating the remainder of the trust to the designated charity.

 

Having a CRT as part of your estate plan strategy is designed to generate income and fulfill your philanthropic goals. Charitable trusts can offer flexibility and some control over your intended charitable beneficiaries as well as lifetime income, thereby helping with retirement, estate planning and tax management.

The Basics of CRTs

Essentially, you create and place specific assets into a CRT. You may continue to manage the assets and you receive an income stream during your lifetime. The charity or charities you designate receive the residual of the trust’s assets after you pass away.

In return for what amounts to a pledge of assets to charity in the future, the donor of the assets placed in the trust receives a current tax deduction for the donation and they avoid any and all capital gains on the donated assets. This means, for example that the donor may place highly appreciated apartment building into the trust, sell the building tax-free and reinvest the proceeds, which are then used initially to provide the income stream to the donor.

The amount of the deduction is calculated in part based on the age of the last income beneficiary.

In addition, the donor receives partial or full elimination of the asset gifted from federal estate tax calculations.

Combining with Other Strategies

CRTs are designed to give the principal to charities when you and your spouse pass away. This bypasses any children, which could lead to your heirs feeling slighted.

These feelings of ill-will can be overcome by combining the CRT with another strategy to “make up the difference” that goes to the charity.

For instance, some large estates combine the CRT with an Irrevocable Life Insurance Trust (ILIT) to provide a cash distribution upon the death of the owner. The ILIT then subdivides into individual trusts for each child or named heir.

In this scenario, everyone wins. The estate owner receives income streams and tax deductions, the charity gets the principal of the CRT, and the children receive a tax-free cash distribution from the Life Insurance.

Other Types of Charitable Trusts