Recently we discussed various ways to incorporate charitable giving into your estate plan. Let’s look at one method in detail.
A charitable remainder trust (CRT) is an estate planning tool that allows individuals to support charitable organizations while also receiving financial benefits during their lifetime. It is an irrevocable trust that provides income to its creator or its designated beneficiaries for a set period, after which the remaining assets are distributed to a chosen charity. CRTs offer tax advantages, income generation and a way to leave a lasting charitable legacy.
When a person establishes a CRT, they transfer assets—such as cash, stocks, real estate and/or other valuable property—into the trust. The trust then provides income to the donor or to named beneficiaries for a specified number of years or for the rest of their lives. Once the trust term ends, the remaining assets go to one or more designated charitable organizations.
The basics
There are two main types of CRTs:
- Charitable remainder annuity trust (CRAT): This provides beneficiaries with fixed annual payments based on the initial value of the trust. Additional contributions cannot be made after the trust is established.
- Charitable remainder unitrust (CRUT): This pays beneficiaries a percentage of the trust’s value, which is recalculated annually. This allows for income to fluctuate based on the trust’s performance, and additional contributions can be made over time.
A CRT offers several advantages for individuals looking to manage their wealth while supporting charitable causes:
- Tax benefits: Donors receive an immediate charitable income tax deduction for a portion of the trust’s value. Additionally, assets transferred into the trust are removed from the taxable estate, potentially reducing estate taxes.
- Income generation: The trust provides a reliable income stream for beneficiaries, which can be beneficial for retirees or individuals looking to supplement their earnings.
- Capital gains tax deferral: If highly appreciated assets, such as stocks or real estate, are placed in a CRT, they can be sold within the trust without immediate capital gains taxes. This allows the full value of the asset to be reinvested.
- Philanthropic legacy: A CRT enables individuals to support charitable organizations that align with their values, creating a lasting impact beyond their lifetime.
A CRT is ideal for individuals with significant assets who want to secure income, reduce tax liabilities and support charitable causes. Because CRTs are irrevocable, meaning they cannot be changed once established, careful planning is necessary. Seeking legal guidance is a good way to start.