Charitable Remainder Trust
CRTs offer current and future income tax and estate tax benefits. In addition, CRTs can be used as retirement vehicles as well as to increase the amount of assets passing to heirs. These advantages can be accomplished, while also establishing a charitable legacy.
How Does a CRT Work?
A CRT is an irrevocable tax-exempt trust that is comprised of two parts. The first part is the income interest, which provides that during a designated period (e.g., the joint lives of you and your spouse), the income from the trust is paid to you or to your heirs. The second part is the remainder interest, which provides that at the conclusion of the income interest period, the trust assets are distributed to a qualifying charity. The charity is the beneficiary of the trust's remainder interest.
Example:
At age 62 you contribute stock valued at $1,000,000 with a basis of $500,000 to a CRT. The CRT provides for a 7% annual payout of the trust's annual value over the joint lives of you and your spouse with the trust remainder passing on the death of the last of you and your spouse to the charity of your choice.
With these assumptions in place, here is how the arrangement would work: You and your spouse will receive retirement income of $70,000 annually (7% of $1,000,000) from the trust for the remainder of each of your lives. Previously, the stock may not have generated any current income. In the year established, you and your spouse would also receive a current charitable income tax deduction of approximately $434,000, which may be required to be spread out over several years. The trustee could even sell the stock and reinvest the proceeds free of any capital gains. Had the stock been sold directly by you or your spouse, rather than through the trust, capital gains taxes at 20% would have been due on the $500,000 gain.
Capital Gains
By establishing the CRT, you create a tax-free environment for the sale of contributed assets.
Because of the tax-exempt nature of the trust, an ideal property to use in funding the trust is highly appreciated capital assets. The highly appreciated assets can be sold by the trust free of any capital gain.
Current Income Tax Deduction
The contribution of property to a CRT establishes an immediate income tax deduction equal to the present value of the remainder interest. The calculation of the deduction is based on a variety of variables, including value of the property contributed to the CRT, age(s) of the income recipient(s), annual payout rate, type of trust and the IRS table rate in effect at the time the trust is established.
Reduction in Estate Taxes
The CRT reduces your estate taxes. This occurs because assets transferred to the CRT pass to the charity at the designated time, so that property may not be subject to estate tax. The savings may be substantial if you are in a high marginal estate tax bracket. Depending on the amount contributed to the CRT, it could completely eliminate the estate tax.
Retirement Income
A CRT can provide a definitive cash flow during your retirement. This can be a significant advantage where the property contributed to the CRT does not produce any cash flow. The CRT therefore can provide an annual payment of either a fixed amount or percentage of the trust assets.
Wealth Can Be Replaced
The tax savings resulting from the income tax deduction could fully fund the purchase of a second-to-die policy which would replace the $1,000,000 placed into the CRT. With respect to any second-to-die policy, a Life Insurance Trust should purchase the $1,000,000 policy. The policy would replace the value of the property passing to charity. Because the policy is held by an irrevocable trust, the insurance proceeds would not be subject to estate tax.
Conclusion
The CRT can be utilized to obtain a current income tax deduction, reduce your overall estate taxes, provide cash flow for your retirement, eliminate a potential capital gains tax on any appreciated assets, and provide for your favorite charity.
