For more than 25 years, countless families have been using Charitable Remainder Trusts to generate income, spend less on taxes, and give to charities. A Charitable Remainder Trust is a type of Colorado trust which is tax-exempt and irrevocable that cannot be altered or revoked after it is created. After a Charitable Remainder Trust is created and funded, the trust will disperse income to the beneficiary for a specified period of time, with everything remaining when this period expires going to a charity specified in the trust. When the remaining assets of the trust go to the charity, no capital gains tax or any other tax will need to be paid by the beneficiary or the person who established the trust.
How Does a CRT Work?
Charitable Remainder Trusts enable people to achieve their future philanthropic goals while still generating current income. In addition to the charitable and tax management benefits, Charitable Remainder Trusts can offer benefits for retirement and estate planning. There are two types of Charitable Remainder Trusts, with each offering similar benefits, but generating income in different ways:
- Charitable Remainder Annuity Trusts (CRATs): Distribute a fixed amount each year as an annuity, with he value of the annuity calculated as a fixed percentage of no less than 5% of the initial value of trust's assets.
- Charitable Remainder Unitrusts (CRUTs): Distribute a fixed percentage of the assets in the trust based on the overall valued assets in the trust.
Contributions to both CRATs and CRUTs are made through the irrevocable transfer of property or cash to the trust. Both types require a mandatory distribution of part of the income or principal to either a beneficiary or the donor. After completion of a specific period, which may be for the life of the beneficiary, the remaining amount gets distributed to one or more charities.
CRTs Earn a Partial Tax Deduction
To be eligible for a partial tax deduction, a CRT can be funded with any asset that has experienced a capital gain including stocks, cash, non-publicly traded assets like private business interests, private company stock, or real estate. The tax deduction that will be available to the person who created the trust is based on many factors with the most important being the type of trust, the term of the trust, the projected income payments, and IRS interest rates that assume a certain rate of growth of trust assets.
Benefits of a CRT
- Preserves the Value of Highly Appreciated Assets: For people with highly appreciated assets for which a substantial capital gain would be due on sale, including non-income producing real estate, a CRT allows the owner of the asset to sell the asset without realizing the capital gain. Upon selling property held by the CRT, no capital gain will be recognized by the original owner. Thus, this will allow a person to preserve the entire fair market value of his/her assets by donating them in-kind to the CRT. While the named beneficiary will pay income tax on the income received from the trust, these income taxes will be paid over time, not all at once as they would if the asset were sold. Because the amount remaining in the trust will go to a charity tax free, the total amount paid in taxes will be less and the total amount that goes to the beneficiary and charity will be more than they would be if the asset had been sold by the original owner.
- Tax Deductions: A CRT allows you to claim partial income tax charitable deductions when the trust is funded. The tax deduction will based on the the amount that is calculated to be distributed to the charitable beneficiary.
- Tax Exemptions: Invest income generated within the CRT, including capital gains and interest, are exempt from taxation. By donating highly appreciated assets to the trust, the assets can be sold without generating any capital gains taxes. However, the income beneficiary will be liable for income tax on the amount received as income.
Who can be a Trustee of a CRT?
You can be the trustee of your CRT. However, you must make sure that you properly administered the CRT or else you might, in some cases, lose the tax advantages or be penalized.
Some people also opt for corporate trustees when the CRT will require a professional who is experienced handling accounting, government reporting, and managing investments. Some charities will accept being appointed as the trustee if it is in their best interest to do so. It is always a good idea to discuss different alternatives and consider their past investment records, experience with trusts, and services they offer. It should always be in your mind that you will depend on the trustee to manage your trust and distribute income to you.
Beneficiaries receive an income stream
Depending on the how the trust has been set-up, the beneficiaries will receive an income distribution semi-annually, annually, quarterly, or yearly. The total annual amount of income that the trust may distribute must be between 5% and 50% of assets owned by the trust.
What Assets May Be Donated to a CRT?
Any or all of the following assets may be donated to a CRT:
- Stocks of publicly traded companies
- Interests in private partnerships
- Stocks closely held companies
- Complex assets
- Real estate
Distribution of the Trust Assets After a Specific Period or Death of the Last Beneficiary
Any assets remaining in the trust after the specified period has passed or the death of the last beneficiary will be distributed tax free to the charitable beneficiaries identified in the trust. The charities can be private foundations or public charities. Depending on the trust documents, the trustee might have the power to change the beneficiary prior to the final distribution from the trust is made.
- Secure your assets out of the reach of creditors
- Help different beneficiaries and charities with one trust
- Turn a lump sum capital gain into lifetime income
Do I Have Some Control After Appointing the Trustee to Manage the CRT?
Yes, you will have control over the trustee for as long as you live. The trustee and not the charity are responsible for controlling the assets in the trust. Your trustee is required to follow the instructions laid down by you in the trust documents. You can always retain the right to change the trustee if you are dissatisfied with the trustee's performance of the required duties. You also have the option to change the charity without losing any tax advantages.
So, Is a Charitable Remainder Trust Good For Me?
A Charitable Remainder Trust may be a great choice for you if you have highly appreciated assets, want to generate a stream of current income, and want to, eventually, make a significant donation to charity. While there are many benefits to a CRT, many people will establish a CRT only for a portion of their assets so that the remainder of their assets can pass to loved ones instead of a charity. For a more detailed explanation of both the advantages and disadvantages of a charitable remainder trust and to find out if a charitable remainder trust can help you achieve your estate planning goals, please set up a time to speak with our experienced Colorado estate planning attorneys through the contact link on our website.