Charitable Trusts trusts (CRT) are valuable planning tools if you have property that will subject to federal estate tax upon your death. CRTs have many lifelong benefits also, and are a great way to accomplish many planning goals: providing a lifetime income stream; selling appreciated property without paying capital gains tax; and, making invaluable contributions to the charity of your choice.

What is a charitable trust?

A charitable remainder trust, or CRT, is an irrevocable trust into which you transfer cash or “appreciated” assets. (These are the ones that are worth much more now than when you acquired them. These are the most likely to be subject to estate tax when you die). With a CRT you keep the right to receive the income earned by those assets during your lifetime (or for a specific, set number of years). When you die, or at the end of the fixed term, the trust assets go to charity of your choosing, and are not subject to estate taxes.

Does transferring assets to a CRT mean my family inherits less?

Not necessarily. You might be able to use a Wealth Replacement Trust (WRT) to replace the value of the appreciated assets that you transferred into your CRT. Then, when you die, your family gets the equivalent value of the assets you transferred to CRT property, without paying estate taxes on the transfer. A WRT buys “replacement” insurance.

What kind of tax benefits do I get from setting up a CRT?

When you create the CRT, you get an income tax deduction for the estimated present value of the assets that will go to the charity when you die or, at the end of the trust term. The amount of your tax deduction depends on your life expectancy, the number of individuals entitled to get lifetime income from the CRT, the amount of the income each will get (from 5% to 50% annual return), and the type of CRT you choose.  The IRS allows either an “annuity trust” or a “unitrust”.

What if I don’t need the full deduction in the year I create the CRT?

You can carry over any unused portion of the deduction for up to five years after you create the CRT.

What are the estate tax and capital gains benefits of a CRT?

If you keep the appreciated assets outside of a trust, the larger the size of your estate means the higher the estate taxes payment when you die. If you sell the “appreciated assets” now instead of putting them in a CRT, you will likely pay a lot of capital gains tax on your profit, the value difference between what you originally paid for it and what the asset is worth now. Once the assets are transferred into the irrevocable CRT, they are no longer considered your property, and are not subject to estate taxation when you die. The property simply passes to your chosen charity at your death. A CRT is tax-exempt. Your trustee could sell the asset without paying any capital gains tax, and reinvest the proceeds in income-producing assets with a higher yield. This means more money is available to generate income for your income beneficiaries, and, more assets will eventually pass to your chosen charity when you die.

How much income can the income beneficiaries receive?

This can vary from 5% up to 50%, and depends on the requirement that a minimum value of assets passes to your charity upon your death.

Can I change who gets trust income?

No. At the time you create the CRT you must designate all of the individuals (or alternates who will be trust beneficiaries if any of your primary beneficiaries die), who will get trust income. None can be added later.

Please call us today at 508-316-3853 if you think you might like to set up a CRT, or have more questions.