Investors seeking to provide income for either their lifetime or a beneficiary, plus leave a legacy for a charitable organization, may consider establishing a trust as one means of doing so. There are various types of trusts, one of which is a charitable remainder trust, or CRT.
A CRT can take either of two forms: unitrust or annuity. If the trust is established as an annuity, the trustor (the individual who creates it) makes one deposit to fund the trust and can’t add funds. The amount of income distributions to either the trustor or their designated beneficiary is set. The second option is a unitrust, and in that case, the trustor can make multiple contributions to the account. Consequently, the distributions that go to the grantor or beneficiary are a percentage that can be adjusted based on those contributions.
What Is the Advantage of This Structure?
If investors have assets (like real estate, stocks, or other investments) that have enjoyed significant appreciation, they may want to consider using the charitable remainder trust. The contributions into the trust are partially tax-deductible. Note the use of the term partially because even though a CRT is an irrevocable trust, the donor (or their indicated beneficiary) will be receiving income from the trust for a specific time. For example, suppose the trust is structured to distribute forty percent of the assets over twenty years. In that case, the deduction equals the sixty percent benefit that the charity (not the beneficiary) will receive after the conclusion of the distribution period.
Another advantage is that by contributing the assets to the trust, the investor may defer and even reduce the need to pay capital gains tax if the trustee sells the asset, even if the income from the sale benefits the trustor or their designated beneficiary. Of course, the beneficiaries or trustor that receives payment from the trust would most likely owe income tax on the distributions they receive from the trust and should consult their tax advisors.
The trustor’s estate will benefit from the establishment of the CRT since the assets transferred will be excluded from estate tax calculations. The life of the trust can either be the lifetime of the grantor, the lifetime of the designated beneficiary, or a fixed time of not more than twenty years. After that, the assets become the property of the indicated nonprofit organization.
Can the Trustor or Beneficiary Dissolve the CRT Early?
Charitable remainder trusts enjoy substantial tax benefits because they are structured as irrevocable. But sometimes circumstances change, and trustors or even beneficiaries may decide that they want to give the advantage of the assets to the designated charity sooner than planned. For example, suppose the dissolution intends to confer the remaining interests of all beneficiaries to the indicated nonprofit. In that case, it is more likely to be successful, but the effort will still require the cooperation of probate courts and the IRS. The beneficiary in this scenario would receive a charitable deduction for the early exit.
The trustee can also terminate the trust by dividing it between the income and charitable beneficiaries. This approach exposes the trust to scrutiny for potential self-dealing and is regulated by IRS procedures. It’s typically only engaged in if the trust needs to be exited to change the income beneficiary.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.