Charitable Remainder Trusts: Income, Tax Benefits, and Legacy

## What is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to you (or other beneficiaries) for a period of time, with the remainder going to charity. This powerful planning tool offers immediate tax benefits, potential income, and philanthropic impact.

How CRTs Work

1. You transfer assets to the trust (irrevocably)
2. The trust sells the assets (often without immediate capital gains tax)
3. The trust pays you income for life or a term of years
4. When the trust terminates, remaining assets go to charity

Two Types of CRTs

Charitable Remainder Annuity Trust (CRAT) - Pays a fixed dollar amount annually - Amount determined at creation (5-50% of initial value) - No additional contributions allowed - Payment amount never changes

Charitable Remainder Unitrust (CRUT) - Pays a fixed percentage of trust value annually - Revalued each year - Payments fluctuate with trust performance - Additional contributions allowed

Tax Benefits

Immediate Income Tax Deduction

When you fund the CRT, you receive a charitable deduction for the present value of the charity's future interest. The deduction amount depends on: - Your age (or measuring lives) - The payout rate - IRS interest rates (Section 7520 rate) - Type of charity

Capital Gains Deferral

The trust can sell appreciated assets without recognizing capital gains immediately. Gains are recognized gradually as you receive trust income.

Estate Tax Reduction

Assets in the CRT are not included in your taxable estate (though income payments continue).

Ideal Candidates for CRTs

CRTs work best for individuals who: - Have highly appreciated assets (stocks, real estate, business interests) - Want income but don't need principal access - Have charitable intent - Want to diversify concentrated positions - Are in high tax brackets

Funding a CRT

Common assets used to fund CRTs: - Appreciated stock (especially concentrated positions) - Real estate (with careful structuring) - Business interests (after sale) - Art or collectibles

Payout Considerations

Minimum and Maximum - Minimum payout: 5% annually - Maximum payout: 50% annually - Remainder to charity must be at least 10%

Choosing the Right Rate Higher payouts mean: - More income now - Smaller charitable deduction - Faster depletion of trust

Lower payouts mean: - Less income - Larger charitable deduction - More growth potential for charity

Naming Beneficiaries

Income beneficiaries can include: - Yourself - Spouse - Children - Others (with gift tax implications)

The charitable remainder must go to a qualified charity.

Advanced Strategies

Flip CRUT Starts as net income with makeup CRUT, then "flips" to standard CRUT after a triggering event (like sale of property). Useful for illiquid assets.

CRT with Insurance Use income from CRT to fund life insurance in an ILIT, replacing the assets "given" to charity for heirs.

Charitable Lead Trust (Opposite) For families wanting to transfer wealth to heirs with reduced gift/estate tax, a CLT provides income to charity first, with remainder to family.