For the past 25 years, endless families have been using CRT (Charitable Remainder Trust) for increasing their incomes, saving taxes, and aid charities. It works by firstly donating certain assets into the trust and having a beneficiary pay for some time. Charitable remainder trust is irreversible, meaning they cannot be aborted or altered by the permission of the recipient. When assets are sold, you do not need to pay any capital gains tax allowing you to help your favorite charities.
There are two types of Charitable Remainder Trusts: -
Contributions to both are the irrevocable transfer of property or cash. In both types, it is mandatory to distribute a part of the income or principal to either a beneficiary or the donor. After completion of a specific period for the income interest, the remainder amount gets distributed to one or more charitable remainder beneficiaries.
To be eligible for a partial tax deduction, a CRT needs to donate stocks, cash, or other non-publicly traded assets like private business interests, private company stocks or real estate. The deduction is based on the kind of trust, the tenure of the trust, the estimated income payments and the IRS interest rates that is an assumption of a specific growth rate for the assets of the trust.
Depending on the way the trust has been set-up, the beneficiaries will get the income semi-annually, annually, quarterly and yearly. According to IRS, the annual income must be at least 5% but cannot be more than 50% of assets owned by the trust.
The assets are distributed to the pre-assigned charitable beneficiaries. They can be private foundations or public charities. Depending on the way the CRT was established, the trustee might have the power of changing the beneficiary during the existence of the trust.
A CRT can donate the following assets:
You can avoid estate taxes as Life Insurance Trust ensures that the insurance proceeds are never included in the estate. It is possible to keep the proceeds of the trust for years allowing you to distribute it among your children and grandchildren periodically.
On top of that, if some proceeds are still left in the trust, it is protected against irresponsible spending and even the creditors. Thus, Life insurance is an inexpensive way of replacing assets for your children. Lastly, besides being available immediately after the demise of you or your spouse, it is free from income and probate taxes.
You can be your trustee. However, you must make sure that it is properly administered or else you lose the tax advantages attached and in some cases, be penalized. For people who make themselves, the trustee usually gets the paperwork done by a qualified third-party administrator.
Some people also opt for corporate trustees as it requires an experience of handling accounting, government reporting, and managing investments. Even some charities are made trustees if they show their willingness. It will be a good idea to interview different alternatives and consider their past investment records, experience with trusts and services they have been offering. It should always be in your mind that you will be dependent on the trustee to manage your trust and distribute income to you.
Yes, you do have control for as long as you live. The trustee and not the charity are responsible for controlling the assets. Your trustee needs to follow instructions laid down by you in the trust. You can always retain the right to change the trustee in case you feel dissatisfied. You also have the option to change the charity without losing any tax advantages.
CRT will be the perfect option in case you are looking for an immediate charitable deduction. More importantly, it will offer you an income stream for you or another person for life. It can also be the perfect option in case you wish to establish a CRT by will and provide for heirs and the remainder being distributed to the charities chosen.