What Is a Charitable Remainder Trust?
Trusts are an important form of estate vehicle, and they come in many varieties. One of these is the charitable remainder trust, commonly referred to as the CRT. CRTs provide numerous advantages for those who want to leave a legacy behind for a noble purpose. Here's how they work.
CRTs Defined, Trust Basics:
As a form of trust, CRTs are structures where someone who owns assets or property, known as a settlor, grants ownership and control over that property to another party. This party is known as the trustee, and it's their duty to manage the assets on behalf of a third party known as a beneficiary. The stipulations for how the property should be managed and identities of the beneficiaries are designated by the settlor in the initial trust agreement. CRTs are irrevocable, or unalterable, trusts. In terms of life planning, the assets you place in such a trust are no longer attached to you or your estate. A CRT pays its beneficiaries periodically according to the value of the assets and the nature of the trust in question. When the beneficiaries die, the remainder of the trust's value goes to a predesignated charity.
How Are CRTs Different From Other Trusts?
When you transfer assets into a CRT, you receive a tax deduction for your charitable contribution. Because the trustee can resell the assets to generate income, you also don't get hit with capital gains tax. This may help you and your charity of choice derive more benefit from the assets.
Essential CRT Facts
Charitable remainder trusts aren't all the same. They actually come in two forms:
Charitable Remainder Unitrust
U.S. law mandates that these trusts, known as CRUs, be organized such that:
- Between 5 percent and 50 percent of the annually computed net fair market value of all the trust's assets is paid to beneficiaries on a yearly basis for a 20 year period or until the beneficiaries perish,
- After the payment period, the remaining asset interest goes to a charity,
- The trust assets can't be used for other purposes, and
- At the time the benefit period ends, the trust must have enough remaining value for the charity to receive at least 10 percent of the value the assets held when they were contributed to the trust.
Charitable Remainder Annuity Trust
In these trusts, known as CRATs, the trust agreement must ensure that:
- Between 5 percent and 50 percent of the initial total fair market value of all the assets in the trust is paid to the living beneficiaries at least annually for up to 20 years or the remainder of their lives,
- At the end of the benefit payment period described above, the remaining property must go to a charitable organization,
- Only the valid benefit payments described above can be withdrawn from the trust, and
- The trust is set up so that the leftover interest that goes to charity is worth at least ten percent of the initial value of all the assets.
CRUs versus CRATs
While the two flavors of CRT seem somewhat similar, there are some key differences you need to bear in mind. Most importantly, CRATs involve single contributions that occur at their creation, but CRUs let settlors keep contributing. With CRATs, the value that the beneficiaries get each year remains constant. For CRUs, it may rise or fall depending on the value of the principal in the trust. Notably, CRUs may be created with terms that let trustees make up for poor earning years by paying beneficiaries more in later bumper years.
With both forms of CRT, beneficiaries can include more than one party. In such a case, however, at least one of these parties must not be a charitable organization like the one that receives the final remainder. Your CRT's beneficiaries don't have to be distinct from yourself. In other words, this form of holding is an effective way to legally reduce your tax burdens and still receive lifelong income from certain assets. While it's even possible to designate yourself as a trustee, doing so requires some fairly involved management to stay on the right side of the law, so most people stick to being beneficiaries.
Choosing Remainder Charities
In some cases, it's permissible to dedicate the remaining interest from a CRT to a purpose other than a lump payment to a charity. For instance, the assets may be retained by the trust on behalf of a charity. If the remaining interest exists in the form of financial vehicles like qualified employer securities, such as common stock issued by an employer, it can be transferred to an eligible employee stock ownership plan.
Is a CRT Right for You?
CRTs are bound by a number of other important regulations. For instance, the valuations that determine how much their interests are worth must meet specific contingency requirements, and trusts that fail to transfer unallocated securities to charities when their benefit periods terminate may incur taxes. In the vast majority of cases, CRTs are effective estate planning tools. It's vital, however, that you plan yours with assistance from a professional. Get in touch with Citadel Law today to learn more.