In our last blog post, we discussed what trusts are and how they are often used in estate planning. This week, we are focusing on a specific type of trust that serves a greater purpose: Charitable Remainder Trusts.
What is a Charitable Remainder Trust?
Charitable Remainder Trusts (CRT) are a powerful way to make a meaningful impact, create an income stream, and reduce taxes. They work by making an irrevocable gift of one's assets into a trust. Then, a selected beneficiary can draw income for a given period in exchange for tax benefits. At the end of the income period, the remaining balance is donated to charity in its entirety.Â
How do CRTs work?
A donor can fund the CRT with public or private stocks, ETFs, mutual funds, property, cash, or other assets. Often, these assets are highly appreciated, making selling them far from ideal when managing one's taxes.Â
By gifting these assets, the donor immediately removes them from their estate, forfeits control, and, depending on the terms laid out in the trust documents, receives a partial tax deduction. The benefit of a CRT is that a donor can gift highly appreciated assets for a tax deduction based on their present value, not their original cost basis.
The result is that a donor can liquidate assets with high tax burdens in exchange for a partial deduction and an income stream for a noncharitable beneficiary or beneficiaries of their choosing for a set period.
The income payout from the CRT is allowed for 20 years or the life of one or more beneficiaries. At the end of this period, the remaining assets must go to a charitable organization.
CRTs pay an income to the noncharitable beneficiary each year between 5% and 50% of the value of the assets when the donor established the trust. However, the remaining assets distributed to the charitable organization must be at least 10% of the original value of the assets at the trust's formation.
CRTs offer income and tax benefits
The power of CRTs is that they offer liquidity for highly appreciated assets tax-efficiently while providing a secure income stream to a noncharitable individual of the founder's choice.
While the income paid to a noncharitable beneficiary can be taxable, they are not a given as it depends upon the income the trust generates.
Furthermore, for those worried about estate taxes, CRTs remove the assets from one's estate, meaning the income and the assets are not subject to estate taxes.
Drawbacks of CRTs
While CRTs are powerful estate planning tools, they are complex and challenging to set up. Furthermore, once a contribution is made to the trust, the gift is irreversible to the donor since they have relinquished control of the assets, regardless of the donor's future circumstances.
Are you interested in forming a CRT?
At Lundeen Abrams Advisors, we are here to help. If you live in MN and are interested in forming a CRT, we would be happy to connect you with a trusted attorney in Minnetonka.Â
We will look forward to talking with you soon!