How does a CRT work? Simply put, you transfer assets to an irrevocable trust established for a charity of your choice. The trust pays the income beneficiary-either you or your designated beneficiaries-an annual income for life or for a set number of years, after which all remaining assets pass to the charity. The CRT can be structured in one of two ways regarding the annual distributions to the income beneficiaries:
- The CRT Annuity Trust. This trust pays the income beneficiary an annual fixed dollar amount equal to a percentage (not less than 5 percent), selected by you, of the initial value of the assets transferred into the trust.
- The CRT Unitrust. This trust pays a fixed percentage (not less than 5 percent) of the fair market value of the trust’s assets, as determined annually, to the income beneficiary. For people who desire some protection against inflation, the CRT unitrust may be more appealing.
Secure Immediate Income Tax Savings
One advantage of establishing a CRT is you can take an immediate income tax charitable deduction in the tax year you fund the trust. So even though the charity is effectively receiving a future gift, you can immediately deduct the present value of the charitable remainder interest, which is the assets the charity will ultimately receive. The amount of your deduction depends on the number and ages of the income beneficiaries and the amount and term of the trust’s income payments. Higher income payments reduce your deduction amount, while lower income payments increase your deduction amount. IRS formulas and tables are used to compute the present value of your donation.
Avoid Capital Gains Tax
A qualified CRT is permitted to sell appreciated assets held in the trust without federal income tax on the gain. In addition to the income tax deduction you receive when you fund the trust, there are also no capital gains taxes imposed when those assets are sold by the trust. The proceeds from the sale may be reinvested in a more diversified or higher yielding investment portfolio. Because there are no capital gains taxes paid on the sale, your trustee has more to reinvest, which should translate to a larger annual distribution to the income beneficiaries.
Charitable Giving Remains a Good Idea
The assets you place in a CRT are removed from your taxable estate, creating a potential reduction in estate taxes. However, the federal estate tax is scheduled for repeal in 2010 as a result of the 2001 tax law. The estate tax repeal is slated to last for only one year unless Congress takes further action to extend it. And even if the estate tax repeal is extended beyond 2010, CRTs will still be an attractive strategy due to the income tax and capital gains advantages. Bottom line: Don’t let the possible repeal of the estate tax prevent you from considering the use of a CRT in your estate plan.
The Advantages of a Charitable Remainder Trust
In addition to the personal satisfaction of supporting a charitable organization, a charitable remainder trust also may yield estate planning, income tax, and other benefits. With a CRT, you can:
- Secure a tax deduction. You’re entitled to a federal income tax deduction, within certain limits, for the present value of the gift.
- Avoid capital gains tax. There are no capital gains taxes paid when assets are transferred to and sold through the trust.
- Enjoy flexibility. You can make anyone you wish, including yourself and your spouse, an income beneficiary.
- Create an income stream. A reliable distribution will be paid out to the income beneficiary of the trust each year from assets that may have previously provided little to no income. TPW