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Articles From Lumsden McCormick

Make a Lasting Charitable Gift with a CRT

The novel coronavirus (COVID-19) pandemic may have you thinking about how you can help those whose health and financial security has been imperiled by the virus. Naturally, charities fighting COVID-19 will welcome your donations now, but you may also want to think about making a more lasting gift. With a charitable remainder trust (CRT) you may be able to support a favorite nonprofit and also enjoy lifetime income and current tax benefits. Learn more about how CRT might fit into your estate plan.

Funding the Trust

When you set up a CRT, you fund it with assets you own. The trust then pays out income to the designated beneficiary or beneficiaries — for example, the trust creator or a spouse — for life or a term of 20 years or less. Alternatively, if certain requirements are met, you can choose to have income paid to your children, other family members or an entity. If it suits your needs, you may postpone taking income distributions until a later date. In the meantime, the assets in the CRT (ideally) continue to appreciate in value. When you die, the remaining assets go to the charity you've designated.

Typically, a CRT is funded with income-producing assets, such as real estate, securities, and even stock in your own company. (Note: S corporation stock can't be used for this purpose.) These assets may be supplemented by cash deposits or the transfer can be all cash.

Current Tax Deduction

When you transfer assets to a CRT, you qualify for a current tax deduction based on several factors, including the value of the assets at the time of transfer, the ages of the income beneficiaries and the Section 7520 rate. Generally, the greater the payout, the lower the deduction.

If you don't itemize deductions every year (because you take the standard deduction instead) consider transferring assets in a year in which you expect to itemize. The deduction for appreciated assets is typically limited to 30% of your adjusted gross income (AGI). However, if the 30% of AGI limit applies, you can carry forward the excess for up to five years.

Two Types

There are essentially two types of CRTs: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). No matter which version you use, the income beneficiary must be entitled to annual payments for his or her lifetime, or for a fixed period of no more than 20 years. In addition, other tax law requirements apply.

With a CRAT, the income beneficiary receives a fixed amount of income year in and year out, regardless of the investment performance of the trust assets. Those who have already retired and want the security of a known income amount often prefer this method. The trust is usually funded with securities and cash.

Tax law requires the fixed payments of a CRAT to equal no less than 5% of the initial value of the trust assets. Unlike the CRAT, which pays out a fixed amount, CRUT payments are based on the investment performance of the underlying assets. Therefore, the amount of your annual income will fluctuate year to year. With a CRUT, a payment of a percentage of not less than 5% of the value of the trust assets must be paid each year.

In either event, a trust won't qualify as a CRT if the annual payout exceeds 50% of the value. Furthermore, it must be clear that the charity is expected to receive at least 10% of the donated assets.

Choosing a Trustee

An important decision relating to a CRT is naming the trustee to manage its affairs. The trustee you choose should be someone with financial acumen and knowledge of your personal situation. Thus, it could be an institutional entity, a family member, a close friend, or even you.

Because significant dollars are at stake, many trust creators opt for a professional — perhaps someone who specializes in managing trust assets. If you're leaning toward this option, interview several candidates and consider factors such as experience, investment performance, and level of services provided. Even if you decide to take on the task yourself, consider using a third-party professional to handle most of the paperwork and provide other support. Frequently, a CRT is supplemented by another trust or a life insurance policy to “make up the difference” to children when the remainder goes to charity.

During the CRT's term, it's the trustee — not the charity — that calls the shots. The trustee is obligated to adhere to the terms of the trust and follow your instructions. Thus, you still maintain some measure of control. In fact, you may retain the right to change the trustee if you become dissatisfied or designate a different charity to receive the remaining assets.

Weigh Your Options

One other thing that's important to note about CRTs is that they're irrevocable. Once you've established one, you can't dissolve it or make other major changes. So be sure to talk it over with your estate planning advisor. There may be other options that enable you to leave lasting gifts to charity and achieve other goals.

Make a Lasting Charitable Gift with a CRT

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Cheryl has extensive experience working with business owners and individuals on minimizing taxes, with a focus on succession planning. With a thoughtful approach, Cheryl helps clients explore their long-term goals and plan accordingly. Leveraging Cheryl’s expertise in this area, the goal is to implement plans that achieve the wishes of the client and provide for tax efficient transitions. Cheryl’s passion for working with corporations and individuals has allowed her to become a trusted business advisor. She has worked with clients not only in the Western New York region but throughout the country. The breadth of this experience has allowed her to collaborate with other professional advisors to ensure that plans are flexible and innovative in the ever-changing world in which we live. Cheryl started her career with the Firm in 1991 and rejoined in 2019 adding additional strength to the tremendous talent of the Lumsden McCormick tax team. 

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