When it comes to charitable giving, you’ll want to make the biggest impact possible. But figuring out the best way to do so isn’t always easy. That’s because there’s a variety of charitable giving vehicles that are tailored to different individual needs and goals.
One of those vehicles is a charitable remainder trust (CRT). They come in multiple forms and provide users with a unique way of giving to the causes they believe in while still being able to generate an income for themselves or their loved ones.
In this article, you’ll learn more about what CRTs are, how they operate, and what advantages and disadvantages they offer to you as a user. Additionally, you’ll be provided with actionable steps to take should you be interested in setting up one of your own.
Table of Contents
- 1 What is a Charitable Remainder Trust (CRT)?
- 2 Pros and Cons of a Charitable Remainder Trust (CRT)?
- 3 Frequently Asked Questions Regarding CRTs
- 4 Why Use a Charitable Remainder Trust?
- 5 How to Set Up a Charitable Remainder Trust
- 6 How CW O’Conner Can Help You Further
- 7 Download our 2023 Financial Planning Guide
What is a Charitable Remainder Trust (CRT)?
A charitable remainder trust (CRT) is an irrevocable trust that’s used as a tool to contribute to charity while generating an income. The grantor (i.e. the trust creator) establishes a CRT by donating assets to the trust.
Once the assets are inside the trust, a stream of income based on their value begins paying out to non-charitable beneficiaries for a pre-established period of time. After this time ends, the remaining value inside the CRT is then transferred directly to all charitable beneficiaries.
CRTs come in two varieties:
- A Charitable Remainder Annuity Trust (CRAT): This type of CRT disperses a fixed annuity yearly to your non-charitable beneficiaries. No allowances are made for additional contributions, and the annuity must pay out 5-50% of the trust’s original assets.
- A Charitable Remainder Unitrust (CRUT): This type of CRT disperses a fixed percentage of the trust’s assets, and the fair market value of those assets is reevaluated annually. A CRUT must also maintain a payout rate between 5-50% of the trust’s assets. However, with a CRUT, you are able to make additional contributions over time.
Pros and Cons of a Charitable Remainder Trust (CRT)?
Tax Deductions: After establishing a CRT, you’re eligible for a partial tax deduction based on the assets you place inside the trust. You’ll be able to deduct up to 60% of your adjusted gross income (AGI) if you contribute cash, or 30% of your AGI when contributing appreciated assets.
Reduced Estate Taxes: CRTs allow assets to be removed from your estate, which can lessen or eliminate future estate tax liability.
Reduced Capital Gains Taxes: CRTs allow for the donation of long-term appreciated assets, which includes property. These assets aren’t subject to capital gains taxes when being donated to the CRT. As a result, you’ll be able to defer, spread out, or eliminate capital gains taxes when your assets are sold by the trust and paid out to your beneficiaries.
Asset Protection: A CRT protects your assets. That’s because, should you pass away, your irrevocable trust shields its value from the likes of creditors and irresponsible family members.
Streamlined Giving: Because CRTs are irrevocable, assets placed inside them will not be subject to the lengthy legal proceedings of probate. Instead, assets can be transferred directly to your charitable beneficiaries.
Irrevocability: CRTs are irrevocable, which means that in many cases, changes cannot be made after one is formed.
Ordinary Income Taxes: The income dispersed to your non-charitable beneficiaries may be taxed as ordinary income.
Administrative Fees: CRTs can be complicated to manage. As a result, you’ll be subject to paying administrative fees to keep your CRT running as planned.
Frequently Asked Questions Regarding CRTs
After your CRT is established, it will distribute an income to you, or one or more of your non-charitable beneficiaries for a set amount of time. After this, the remainder of your CRT’s value will be distributed to one or more of your charitable beneficiaries.
Please note: CRTs can last up to 20 years, or the full lifetime of a non-charitable beneficiary. After the set amount of time expires, the remaining value of your CRT will be distributed to your charitable beneficiaries.
The payout rules of your CRT will depend on its type. For a charitable remainder annuity trust (CRAT), you’ll have a fixed annual annuity that pays at least 5% (but no more than 50%) of your trust’s original assets to your non-charitable beneficiaries. Additionally, you’ll be unable to make any additional contributions for future payouts.
With a charitable remainder unitrust (CRUT), you’ll have a fixed percentage of your assets paid out to your non-charitable beneficiaries. The payout amount is recalculated each year, but it remains a fixed percentage between 5 – 50% of the fair market value of the trust’s assets. However, you will be able to make additional contributions to your CRUT for future payouts.
10 Percent Rule
The IRS requires that a minimum of 10% of the initial net fair market value of your CRT’s property be donated to your charitable beneficiaries.
Here’s an example:
You establish a CRT by contributing assets with an initial net fair market value of $950,000. That means your trust will need to pass on at least $95,000 (i.e. 10% of $950,000) to charity to abide by IRS rules. This number will remain constant with a CRAT because no additional contributions are allowed. However, new 10% allotments will need to be calculated should you open a CRUT and make additional contributions over time.
Death of a Beneficiary
If an income beneficiary passes away the assets in the trust are then passed on to the charitable organization(s). As a result, the death of a non-charitable beneficiary can impact how much a charity ends up receiving depending on the terms of your trust.
For example, if your trust is set to terminate upon the death of a non-charitable beneficiary, a charity can receive more should they pass away earlier than anticipated. In contrast, should an income beneficiary live longer than expected, a charity may receive less than anticipated. However, in both scenarios, the charity still must receive a minimum amount of assets to fulfill the requirement of the 10 Percent Rule.
Change a Beneficiary
The charitable beneficiary of your CRT must be an eligible nonprofit organization (e.g. charity, private foundation, church), and you’ll select one or more when creating your trust. However, you may decide it’s necessary to change the beneficiary. If this happens, you’ll have to consult a legal professional, pay additional fees, and have a trust amendment created.
Planning Tip: You can select a donor-advised fund (DAF) as your charitable beneficiary. As an independent trustee, the DAF can then make changes to your nonprofit beneficiaries at no additional expense to you.
Dissolve a CRT
The most straightforward way to dissolve a CRT early is to have all of your trust’s income payments made directly to your charitable beneficiaries. In most instances, this is seen as a “merging” of your trust’s beneficial interests in the eyes of the law.
However, it’s still possible to dissolve a CRT and have some of its value paid out to your non-charitable beneficiaries. This happens when the CRT is seen as “selling” its income interest to the charitable beneficiaries.
When this occurs, an actuarial calculation is used to determine the worth of the CRT’s income interest as of the date of the dissolution. This amount is then paid out to the non-charitable beneficiaries, and the remaining balance is distributed to the charitable beneficiaries.
Why Use a Charitable Remainder Trust?
The main reason to use a CRT is that it allows you to simultaneously give to the causes you believe in while still providing an income for yourself or a loved one. When these two things are desired, a CRT may be your best option given its numerous tax benefits.
Planning Tip: A CRT is just one of the many charitable giving vehicles out there. Make sure to do your due diligence on your other options before moving forward with an irrevocable trust. Feel free to check out our estate planning guide for a list of alternatives in supporting charities.
How to Set Up a Charitable Remainder Trust
Setting up a CRT will require communicating with a variety of professionals. You’ll also need to determine whether or not the nonprofit organizations you’re looking to support are eligible in the eyes of the IRS. Below is a general outline of all the steps, and their respective order, in setting up a CRT for yourself.
Step 1: Create a CRT with the help of the right professionals
Step 2: Ensure the IRS approves your charitable organization(s)
Step 3: Contribute assets to your CRT
Step 4: Name the charitable organization(s) as the Trustee
Step 5: Name the non-charitable beneficiary(ies), which may include you, set to receive an income stream
Step 6: Determine the duration of the CRT term where income is dispersed to its non-charitable beneficiaries
Step 7: Allow your CRT to disperse income for the duration of its full term, then have its remaining assets paid out to charitable beneficiaries.
How CW O’Conner Can Help You Further
At CW O’Conner we’re grateful to help our clients make a difference in the world. And with our assistance, they’re able to identify the tools that make the most sense for them, and the charities they support.
Charitable remainder trusts provide a powerful opportunity to give. That’s because they allow you to support organizations that align with your values while creating an income stream for yourself, or someone else you’re looking after.
As your trusted financial partner, we can weigh the pros and cons of charitable remainder trusts together. We can determine if one is right for you, and if so, what type is best. Additionally, if you’re unsure of what professionals to work with, our extensive professional network can be leveraged to put you in touch with the right people.
If you’re interested in setting up a CRT, or learning more about whether or not one may be right for you, please don’t hesitate to reach out. You can call us directly at 770-368-9919, or fill out a contact card, and we’ll reach out to you.
The opinions and analysis expressed herein are based on C.W. O’Conner Wealth Advisors, Inc. research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.