What is a Charitable Remainder Trust and when would I consider using it?

Posted by on Apr 5, 2016 in Estate Planning, Financial Focus, Tax Planning

The answer to this question is relatively simple, but the trust itself is complex and has complex rules and requirements. For the purposes of this blog, here are the basics:

A Charitable Remainder Trust (CRT) is an irrevocable agreement in which a donor transfers assets to a trust in exchange for the right to receive income.

The first reason you would consider a CRT is because you are charitably inclined. This vehicle can provide a way to give, when you might otherwise be unable to do so. In addition, if you are considering an action that has a significant tax liability and/or you need to generate income, this type of trust can provide certain advantages.

One of the key features of a qualified CRT is that it is exempt from income tax, permitting the tax-free sale of appreciated assets and irrevocably designating the remainder for the benefit of one or more charitable beneficiaries.

There are four parties involved in a CRT:

  1. A donor
  2. A trustee
  3. One or more income beneficiaries
  4. A charitable remainder beneficiary

The process of creating a CRT involves creating a trust agreement through an attorney to transfer assets to be managed and maintained by the trustee. The trustee agrees to pay an income stream at a specific payout rate between 5% and 50% to one or more designated income beneficiaries for the rest of their lives or for a designated period of time. At the end of the trust term the trustee delivers the remaining assets to the charitable remainder beneficiary.

The trust must specify how the income interest will be paid to the income beneficiaries. It can be paid as a fixed amount, called a Charitable Remainder Annuity Trust (CRAT) or as a fixed percentage of the trust assets, called a Charitable Remainder Unitrust (CRUT). Within the CRUT there are three additional classifications: a SCRUT, NIMCRUT and Flip-CRUT.

Income beneficiaries of a CRT are taxed based on a 4-tier accounting system. Each item of income must be separated into four categories. Ordinary income items such as interest and dividends are passed out first, followed by short-term capital gains, long-term gains, tax exempt interest, and trust principal.

If you think this still sounds like a good fit for you, carefully weigh the complexity of the taxes, the costs of creating the trust, administering the trust, and managing the assets maintained by the trust against the benefits to the charity, the tax advantages and potential lifetime payments.

Some of your eyes may have been crossing by the time you got to the fourth paragraph and it is important to have the help of experienced professionals to follow this path. We are happy to help you determine if a CRT would or would not make sense in your particular circumstances.

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