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Charitable Remainder Trust
Last Updated: June 05, 2013
One possible strategy for dealing with highly appreciated property such as raw land, a family business, or employer stock, is to use a Charitable Remainder Trust (CRT). A Charitable Remainder Trust is an irrevocable trust created to provide an income stream to the income beneficiary, while a charity receives the remainder value when the trust terminates. There are a number of different types of CRTs available and many technical rules apply, but generally Charitable Remainder Trusts work as follows:
- First a donor establishes an irrevocable CRT and funds it; typically with highly appreciated assets, naming a charitable organization as the remainder beneficiary.
- Since charitable gifts are excluded, the donor owes no gift tax, nor does he use any of his lifetime gift tax exemption.
- The donor receives an immediate income tax deduction for the amount of the present value of the charitable organization’s remainder interest (a complex calculation based on the donor’s life expectancy, the adjusted payout rate, and a federal interest rate).
- The trustee the donor selected sells the highly appreciated assets and reinvests the proceeds into income-producing assets. The sale can be done without paying the capital gains tax that would have otherwise been required immediately.
- The trustee must pay the donor an income stream from the trust as either a fixed dollar amount (Charitable Remainder Annuity Trust) or fixed percentage amount (Charitable Remainder Unitrust). The initial amount must be at least 5%, but not more than 50% of the trust’s value.
- The income stream distributed to the donor is taxed on a pro-rata multi-tiered system with portions of each payment being ordinary income, capital gains, and tax free distributions of principle.
- Finally, upon termination of the Charitable Remainder Trust, the remainder in the CRT is given outright to the charity.
