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.
