Charitable Trusts: A Charitable Remainder Trust is an irrevocable, tax-exempt trust with an income beneficiary and a charitable beneficiary. There are two main categories of charitable trusts: Charitable Remainder Trusts and Charitable Lead Trusts.
Charitable Remainder Trust: A donor establishes a Charitable Remainder Trust “CRT” and selects an income beneficiary(s), trustee(s), and remainder beneficiary (charitable organization). The donor irrevocably transfers property to the trustee of the CRT. The trustee can invest and reinvest the property. The income beneficiary (usually the donor) receives an income from the trust. On the donor’s death (or other triggering event), the property still in the CRT passes to the named charitable organization.
Income Tax Deduction: The gift to the trust creates a current income tax charitable deduction for the donor. This is a nice plus, but in and of itself does not make the CRT worthwhile.
Capital Gains Avoidance: The trustee of the charitable remainder trust can then sell the assets the donor gave to the trust, without realizing any capital gains taxes. People with highly appreciated assets often gift those assets to a charitable remainder trust so that the asset is not reduced by a capital gains rate. For example, if a donor were to sell $100,000 ACME stock outside of a trust, he or she would pay federal capital gains tax as well as a state tax, leaving him or her with much less money (probably around $75,000). However, if the donor gifts that ACME stock to a charitable remainder trust, the trustee could sell that stock without paying any taxes, leaving the full $100,000 value in the trust.
Enhanced Income Stream: During the donor’s lifetime or over the course of the lifetime of the donor and his or her spouse, the donor can receive an income from the trust. Therefore, the charitable remainder trust serves as a hybrid of a qualified plan. Not only were the original assets sold tax free, but they accumulate tax free, and they kick out an income to the donor while he or she is living. The income the donor is receiving from the trust is greater than the income he or she would have received had he or she sold the $100,000 of ACME stock outside of the trust. The reason is if the stock was sold outside the trust, the tax would have reduced the asset base from which he or she would be getting his or her income. Now he or she gets income off of $100,000 rather than off of approximately $75,000.
Estate Tax Avoidance: On the donor’s death or on the death of both the donor and the donor’s spouse, the assets remaining in the charitable remainder trust would pass to a charity that the donor would have named ahead of time. No estate tax is due.
Legacy/Charitable Impact: The not-for-profit organization will utilize the assets to make society better in some way (if not, you made a bad choice!).
Ultimate Distribution: For many, it is a disadvantage that the charity or foundation receives the remainder rather than family members.
Irrevocable: Once the asset is in the CRT, it’s there for good (so be sure you won’t change your mind!). Be sure not to put too large a percentage of your net worth in a CRT because you have a right only to the predetermined income stream, not to all the assets in the trust.
Charitable Lead Trusts: A Charitable Lead Trust is a Charitable Remainder trust in reverse. A Charitable Lead trust provides a charity with income for a period of time, with an individual(s) receiving the remainder when the income period ends.
Decision Making: CRTs make a great deal of sense for those that are charitably inclined. If charitable giving is not one of your main goals, the decision as to whether a CRT is right for you should be made by balancing the tax benefits (income tax deduction and capital gains savings) of a CRT against the income flow that would be created by selling the asset outside of a trust and spending the proceeds.