A charitable remainder trust, (CRT), is a type of trust that provides annual payments to people named as the “beneficiaries.” The creator of the trust, called a “trustor” in legal terminology, can name themselves as a beneficiary and receive payments from the trust. Or, they can name other people or entities as beneficiaries. There are gift and estate tax considerations if someone other than the trustor receives the payments.
The payments to beneficiaries may be made for a term that cannot exceed 20 years or for the life of the beneficiary. Most importantly, what is left in the trust after the beneficiaries have been paid is then donated to a charity named in the trust documents. The charities can be public or private foundations.
Just like other kinds of trusts, a CRT needs to have a trustee. A trustee manages the assets of the trust and makes sure that it operates as directed in the trust documents. The trustee needs knowledge and experience with investments, accounting, and government reporting, which are the duties of the trustee. For these reasons some trustors select a corporate trustee, i.e. a bank or trust company that specializes in managing trusts. Some charities can also serve as trustees.
Before naming a trustee, the trustor should interview several candidates and consider their investment performance, services, and experience with CRTs. The trustee of a CRT bears a lot of responsibility for managing the trust properly so as to provide the beneficiaries with income and the remaining charities with their donations. It is also wise to consider a potential trustee’s specific experience with the type of assets that will be used to fund the trust. A trustor can change the trustee if they become dissatisfied with the trustee’s performance.
A CRT is irrevocable, which means that once created, it cannot be changed or undone without the permission of the beneficiary. The trustor who gives funds to the trust cannot get them back once the trust is set up. The trustor can, however, change the charities that receive the remainder after the CRT is established. The trustor receives certain tax advantages under the Internal Revenue Service (IRS) code.
What are Some Advantages of a Charitable Remainder Trust?
The trustor who creates a CRT, can donate cash, stocks and even assets such as real estate, private business interests and private company stock to a CRT upon its creation. There is one limitation on the assets that can be used to fund a CRT and it is that a CRT cannot hold S-corp stock.
After funding the trust with assets, the trustor then becomes eligible to take a partial tax deduction. Calculation of the partial income tax deduction can be complicated as it is based on the type of trust, the term of the trust, the projected income payments, and IRS interest rates which assume a certain rate of growth for trust assets.
Depending on how the trust is set up, the trustor or other beneficiaries specified by the trustor can receive income annually, semi-annually, quarterly or monthly. According to IRS rules, the annual annuity must be at least 5% but no more than 50% of the trust’s assets.
When the term for payments to the beneficiaries comes to an end, or when the last beneficiary dies, the assets that remain in the trust are distributed to one or more charities that are specified in the trust documents when the trust is created.
There are several other advantages associated with CRTs, most of them having to do with taxation. These may include:
- There is an immediate partial tax deduction for the creator of the trust for the contribution of assets to the trust;
- Capital gains included in the assets that fund the trust are not taxed;
- The trustor may control the trust’s investments if the trustor serves as a trustee also;
- Trustees may invest and diversify the trust assets in an environment that is tax-free (in a manner that is similar to IRAs), i.e. the income and gains realized by the trust on trust assets are not taxed;
- No estate tax is levied for assets that are held in the trust.
- Assets in a trust are also protected from creditors, whereas the same assets held by their owner are not protected from creditors.
A CRT is especially advantageous for a trustor who has assets they have held for a long period of time and that have appreciated in value. If these assets are donated to the trust, the trust does not have to pay capital gains tax on the gains that the assets have realized. If the trustor were to sell these assets themselves, the trustor would have to pay capital gains tax. So this provision is quite advantageous.
While it is advantageous to the trust beneficiaries and the charities that receive the remainder not to have to pay taxes on capital gains realized when trust assets are sold, the named income beneficiaries do have to pay income tax on the income stream received from the trust.
While CRTs require that the assets are ultimately given to a charity, the tax advantages are favorable incentives for people to create CRTS. In particular, CRTs are favorable for people who are already contemplating transferring some of their assets to a charitable entity. It is also advantageous for a person who wants to set up an annuity either for themselves or others.
A CRT is a good option if the trustor wants an immediate charitable deduction, but also wants to establish an income stream for themselves or another person. A CRT can also be established in a will as a way to provide income for heirs, with the remainder going to charities of the trustor’s choosing. CRTs are also used as a vehicle for avoiding the estate tax. Of course there are a variety of different vehicles for charitable giving from which a trustor can choose. An experienced estate planning lawyer can provide in depth advice on this issue.
Are There Different Types of Charitable Remainder Trusts?
There are two basic types of CRTs, with the difference having to do with the way that the payments from the trust are made. These are:
- Charitable Remainder Annuity Trusts (CRAT): Fixed payments are made every year to the beneficiaries; CRATs do not allow the creator to make additional contributions to the trust’s assets after its creation; donations of cash or readily marketable assets are best for funding an annuity trust;
- Charitable Remainder Unitrust (CRUT): Payments are made according to a set percentage of the trust assets each year. Payments will vary, because the value of the trust assets changes from year to year. The creator of a CRAT is allowed to make additional contributions to the trust’s assets after its creation.
Do I Need a Lawyer for Assistance With a Charitable Remainder Trust?
A charitable remainder trust can be a useful vehicle for people seeking ways to distribute their assets other than through inheritance. However, creating and executing a charitable remainder trust can be complicated. CRTs generally require the expert advice of a qualified tax attorney or an experienced trust lawyer.
You would want an attorney to prepare the documentation necessary to establish the trust and possibly a tax attorney to advise you on which assets to use for funding it, given the tax advantages that can be realized through a CRT. You are most likely to set up the trust properly and to fund it most advantageously if you have the advice of an trust lawyer or a tax lawyer.