Investor Education | The lowdown on charitable remainder trusts

A valuable estate-planning tool for decades, the charitable remainder trust (CRT) has generated increased interest in recent years. Now that the usual 15% tax rate on long-term capital gains has been raised to 20% for upper-income investors and a 3.8% surtax may also apply to a portion of your investment income, there are added incentives to look into a CRT. This is a popular way to shield assets from adverse tax consequences.

How it works: You transfer appreciated property such as a business interest to the CRT and designate a beneficiary to receive income from the trust for life or a period of years. For instance, you might name your spouse as the income beneficiary of the trust. The beneficiary pays tax on the amounts received from the trust. At the end of the trust term, the property goes to the charity named at the outset.

This can accomplish both long-term and short-term objectives. For instance,

  • A donor can claim a current tax deduction for the value of the remainder interest that passes to the charity. The value of the donation is based on special government tables.
  • The donor may also avoid a potentially large capital-gains tax on the sale of appreciated property.
  • The designated beneficiary can rely on a steady stream of income from the CRT to sustain him or her in retirement.

The CRT may be combined with a “wealth replacement trust” to achieve additional estate-planning benefits. The tax savings generated by the CRT funds a wealth replacement trust in whole or in part. The trust then uses the money to purchase life insurance to replace the wealth donated to charity. When all is said and done, your heirs come out even or ahead of where they would have been had you not set up the CRT in the first place. Although there are several variations, the two main types of charitable remainder trusts are CRATs (charitable remainder annuity trusts) and CRUTs (charitable remainder unitrusts). No matter which one you use, the income beneficiary must be entitled to an annual payment each year for life or for a period of no more than 20 years.

With a CRAT, the payment must be a fixed amount equal to at least 5% of the initial value of the trust property, while a CRUT requires payments of a fixed percentage (not less than 5%) of trust assets. In either event, a trust will not qualify as a CRT if the annual payout exceeds 50%. Also, it must be clear that the charity will receive at least 10% of the donated assets.

Finally, be aware that a CRT is irrevocable. In order words, you can’t change your mind and take back your assets. Also, there are fees for establishing and maintaining the trust.

Of course, a CRT is not for everyone. When it makes sense, coordinate this technique with other aspects of your estate plan. You can rely on your professional advisers for assistance when needed.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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