Attention taxpayers…are you looking to support a charitable cause while also reducing taxes and generating income? A Charitable Remainder Trust (CRT) could be the solution. Here are the ins and outs of this valuable estate planning tool.

What is a Charitable Remainder Trust?

A CRT is characterized as a gift of cash or other property to an irrevocable trust. The trust pays amounts to non-charitable beneficiaries - including donors, spouses and heirs - and a remainder to charitable beneficiaries. Under this structure, the trust generates income for donors and their beneficiaries, with the remainder of the donated assets eventually going to one or more nonprofit organizations the donor selected.

How does a CRT work exactly?

Here’s a closer look at this powerful tax planning tool:

1. A donor transfers assets into a trust, removing them from their taxable estate.
2. The trust then makes yearly distributions to non-charitable beneficiaries in one of two ways- 1) as a fixed amount (Charitable Remainder Annuity Trust, CRAT) or 2) as a percentage of trust assets recalculated annually (Charitable Remainder Unitrust, CRUT)
3. The donor immediately receives a charitable income tax deduction based on the present value of the remaining interest going to charity. Also, the trust can sell appreciated assets without triggering capital gains tax since it is tax-exempt.
4. At the close of the trust’s term (either a set number of years or upon the donor’s passing), the remaining assets go to the designated charity.

What are the tax advantages of a CRT?

A CRT is a fantastic option for donors looking to support charitable causes while simultaneously managing their financial obligations. Key benefits include:

Income tax deduction- Donors can reduce taxable income by claiming a charitable deduction for the present value of the CRT.

Capital gains tax deferral- CRTs are tax-exempt, so appreciated assets can be sold without incurring immediate capital gains tax.

Estate tax reduction- CRTs allow donors to remove assets from their taxable estate, thus lowering estate tax liability.

Who should consider a CRT?

CRTs are ideal for taxpayers who:

• Own highly appreciated assets (especially concentrated positions when you want more diversification) and want to avoid immediate capital gains taxes
• Seek a steady income stream during retirement.
• Wish to reduce their taxable estate while supporting charitable causes.
• Want to create a legacy that benefits both their heirs and nonprofit organizations.

Any drawbacks to CRTs that should be considered?

Yes, it is important to factor in some key items:

• CRT distributions are deemed to consist first of income that is subject to the highest federal income tax rate in effect at the time of the distribution and then of income that is subject to progressively lower rates in effect at the time of the distribution.
• Once assets are transferred to a CRT, the decision is irrevocable.
• The IRS requires a minimum payout of 5% of the trust’s assets annually.
• Working with an estate planning attorney and tax advisor is crucial since establishing a CRT involves legal and financial complexities.

A Charitable Remainder Trust is a strategic way to turn a tax liability into a financial and philanthropic win-win. By leveraging this trust structure, donors can enjoy income benefits, reduce taxes, and leave a lasting impact on the causes they care about.