Achieve Multiple Estate Planning Objectives with a Charitable Remainder Trust (CRT)
Posted by Isabella Newman on October 02, 2024
If your estate planning goals include supporting a charity and passing wealth to your family under favorable tax conditions, a Charitable Remainder Trust (CRT) can help you accomplish both. This flexible estate planning tool provides income for you or your beneficiaries and leaves a lasting charitable legacy.
Understanding CRTs
A CRT is typically funded with assets like cash or investments, and it distributes income to designated beneficiaries — often yourself or your spouse — for life or a term of up to 20 years. After the income term, the remaining assets are transferred to one or more charitable organizations of your choosing.
One key benefit of establishing a CRT is the potential for a current tax deduction, which depends on several factors: the value of the assets contributed, the ages of the income beneficiaries, and the IRS Section 7520 rate. Generally, a higher income payout to beneficiaries results in a lower tax deduction, as less will ultimately go to charity.
Types of CRTs
There are two main types of CRTs, each with distinct features:
- Charitable Remainder Annuity Trust (CRAT): This trust pays a fixed percentage (between 5% and 50%) of the initial trust value annually. However, once the trust is funded, additional contributions aren’t allowed.
- Charitable Remainder Unitrust (CRUT): This option provides annual payouts based on a fixed percentage of the trust’s current value, which is recalculated each year. It also allows for additional contributions.
CRATs offer predictable, steady payouts, regardless of fluctuations in asset values. CRUTs, on the other hand, adjust payouts based on the trust’s annual performance, offering a potential hedge against inflation. However, CRUT payouts may decrease if the value of the trust declines.
Selecting a Trustee
A key decision when establishing a CRT is choosing a trustee to manage the trust’s assets. This individual or entity should have the financial expertise to handle trust management and an understanding of your personal financial goals. Trustees can be professionals, institutions, or even family members and close friends.
Many opt for a professional trustee, given the complexities of managing trust assets and compliance. If considering this route, it’s essential to interview candidates and evaluate factors like experience, investment performance, and services offered. Remember that while the trustee manages the assets, you retain certain controls, such as the ability to replace the trustee or change the charitable beneficiary.
Commitment to the CRT
It’s important to note that a CRT is irrevocable, meaning once it’s established, it cannot be undone. As such, you should be fully committed to this strategy before moving forward.
If you’re considering a CRT, contact us to explore whether it’s the right tool to meet your estate planning goals while supporting charitable causes.
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Isabella is a manager in the tax department, providing tax compliance and planning services to a variety of commercial businesses and individuals. While a student at Daemen University, she served as chief editor to the school’s literary magazine. Prior to joining Lumsden McCormick, Isabella had experience working at a local accounting firm.