The Tax Advantages of Charitable Remainder Trusts - Rodgers & Associates

The Tax Advantages of Charitable Remainder Trusts

Money Growing

What happens when you combine aging baby boomers and a stock market reaching all-time highs? A renewed interest in chari­table remainder trusts (CRT).

The oldest of America’s 72 million baby boomers are turning 68 in 2014. Many of these boomers have retired and are thinking about maintaining income through the end of life expectancy. Retirees in their late 60s are also thinking about their estate plan and how to give back to the community. The stage is set for CRTs.

What Is a CRT?

A CRT is an irrev­o­cable trust that provides for a specified amount of income, paid at least annually, to at least one person for a period specified in the trust, with the remaining balance paid to at least one chari­table benefi­ciary. CRTs are typically set up to pay over the life expectancy of the donor and can be desig­nated to pay over a joint life expectancy. The donor can fund the trust with highly appre­ciated assets and avoid paying capital gains tax on the sale. The donor receives a partial tax deduction for the value of the assets donated to the trust. The amount of the deduction is based on the estimated value of the income stream. Part of the income stream is considered a return of principal, and therefore is not subject to tax. The donor receives a tax deduction, a tax-advantaged stream of income for life, and the satis­faction of knowing an organi­zation will benefit from their gift at some point in the future.

How To Set Up a CRT

A CRT can be set up in various ways. A chari­table remainder annuity trust (CRAT) pays a fixed amount (not less than 5% of the initial fair market value of the trust), to one or more persons who is living at the time of the creation of the trust. The term can be for a period of years (not in excess of 20 years) or for the life or lives of such individual or individuals.

The amount paid from a CRAT is fixed once, at the time the trust is estab­lished, and cannot be changed regardless of fluctu­a­tions in portfolio value. For this reason, additional contri­bu­tions to the CRAT are prohibited. The donor enjoys the tax benefits specified above and has confi­dence in knowing the income will not fluctuate.

A chari­table remainder uni-trust (CRUT) is a trust that pays a fixed percentage (which is not less than 5%) of the fair market value, which is valued annually. The income can be to one or more persons who are living at the time of the creation of the trust. The term can be for a period of years (not in excess of 20 years) or for the life or lives of such individual or individuals, just like the CRAT.

The value of the CRUT may be deter­mined on any date during the taxable year of the trust or the average of valua­tions made on more than one date during the year, as long as the same valuation date or dates and valuation methods are used consis­tently. The amount of the annual distri­b­ution will fluctuate with the market value of the trust assets. Revaluing the trust assets allows the donor to make additional contri­bu­tions to their CRUT.

Deciding Which Is Right For You

Choosing between the CRAT or CRUT format is greatly influ­enced by the donor’s age, risk tolerance, and market condi­tions. The CRAT format is usually selected by individuals who are averse to risk or have short investment horizons. Upside potential is sacri­ficed in exchange for the assurance of a fixed income stream, regardless of investment perfor­mance or fluctu­a­tions in trust value. Donors who opt for the CRUT format often have higher risk toler­ances or are concerned about inflation over a longer investment horizon. In times of inflation or economic prosperity, a CRUT may be preferable because the donor’s income varies in direct proportion to the annual fair market value of trust assets.

A big advantage to non-profits under CRT arrange­ments is that they are irrev­o­cable. Unlike bequests in a will, which can be altered or withdrawn when a donor gets remarried or simply changes his or her mind. Each day 10,000 baby boomers are turning 68. Non-profits need to under­stand how their organi­za­tions and potential donors can benefit from CRUTs and CRATs to take advantage of this important demographic shift. One of the biggest fears for a retiree is running out of money. They may be reluctant to make a large gift out of concern they would need the assets for increasing expenses. A CRT permits the donor to maintain the income from the assets, as long as they are living.

Many planned-giving experts agree that interest in CRTs is likely to grow, as a result of increased income and capital gains taxes many people now face. Most taxpayers have used up loss carry forwards that resulted from the great panic of 2008–2009. Avoiding capital gains, creating a tax deduction that could be used to offset capital gains outside of a CRT, and providing for a tax preferred stream of future income…what more could you ask for?

Rick’s Tips:

  • A CRT provides a way to make a deferred chari­table gift now while maintaining income from the assets.
  • A CRAT produces a fixed amount of income that doesn’t change from year-to-year.
  • A CRUT produces a varying amount of income based on the annual value of the assets in the trust.