A charitable remainder trust (CRT) can be a highly
effective financial and estate planning tool. The CRT can allow you to: avoid
capital gains taxes on highly appreciated assets, however when income is
distributed to the income beneficiaries it is taxable; receive an income stream
based on the full, fair market value (FMV) of those assets; receive an
immediate charitable deduction; and ultimately benefit the charity(ies) of your
choice.
Some individuals may be reluctant to transfer significant
assets to a CRT because they would rather see their children be the ultimate
recipients of the property. However, transferring property to a CRT doesn’t
necessarily mean your children cannot benefit as well.
Under the appropriate circumstances, and over time, you (the
donor) can apply the money you saved in taxes available from your charitable
deduction, along with a portion of the CRT’s income stream (if necessary), to
purchase a life insurance policy inside an irrevocable life insurance trust
(ILIT).
After the death of the last income beneficiary, the charity
receives the remaining assets in the CRT, while your children generally receive
the proceeds of the life insurance policy, free from income and estate taxes,
upon the death of the insured in accordance with the terms of the ILIT. In some
instances, policy proceeds may be equal to, or even exceed, the value of the
transferred property.
General Guidelines
A CRT starts with a contribution of assets—preferably highly
appreciated—into an irrevocable trust. Once the trust is funded, the trustee
pays the non-charitable beneficiaries (selected by
the donor upon establishment) an income each year for their lifetimes, a term
of years, or a combination of the two.
If a term of years is involved, the maximum term is 20
years. Income beneficiaries must receive a minimum percentage payout each year
equal to at least 5% of the trust’s assets, not to exceed 50%. The present
value of the charitable remainder interest cannot be less than 10% of
the fair market value of the contributed asset’s value at inception. Within
these broad guidelines, you can select a number of flexible payment options
designed to help meet your specific financial, estate, and charitable giving
objectives.
Additional
Benefits
Because a CRT is tax-exempt, the trustee can sell
highly appreciated assets on a tax-free basis and reinvest the full proceeds in
other assets more likely to meet the growth and income objectives of the trust.
Assets donated to the trust are removed from your taxable estate, potentially
avoiding significant future estate taxation and likely reducing future probate
costs. Donated assets are also protected from the claims of creditors. This
feature may be particularly attractive to business owners concerned about their
personal liability or to those who are sensitive about issues related to the
division of assets in a divorce.
The charitable deduction available to a donor may be limited
according to the type of property donated, the kind of organization(s)
ultimately receiving the gift, the donor’s overall tax status, the age(s) of
the income beneficiary(ies), and the trust’s income payout provisions. If a
deduction is limited for the current year’s tax return, Internal Revenue
Service (IRS) rules allow unused amounts to carry forward for up to five
additional, consecutive tax years.
Moreover, since donations of appreciated property are no
longer preference items for the alternative minimum tax (AMT), donating
such property may now be much more advantageous. (Under prior law, the AMT
could, in many cases, have significantly trimmed the potential income tax
deduction available for donations of appreciated property.)
The Choice is
Yours
While most people may be resigned one way or another to the
inevitability of taxation, many may be unaware that they have a choice
regarding the form in which their contribution to society is fulfilled.
When viewed from the perspective of a choice to channel funds directly
to select charities rather than through the government, charitable giving takes
on a new meaning. The CRT may then become a valuable tool to facilitate your
choice. As with all complex financial transactions, you may wish to seek the
assistance of your estate planning team, which should include your attorney and
financial services professional, to help ensure your wishes are properly met.
