A charitable remainder trust (CRT) could address many of your personal financial goals while providing the ability for you to make a significant gift to the qualified organizations of your choice. CRTs are planning tools that allow you to take control of your social capital — the portion of your wealth that is customarily paid in taxes to the government. With a CRT, you designate the qualified organizations that will receive your social capital and you also receive significant financial benefits. Anyone who is subject to paying capital gain taxes on appreciated assets and whose estate is subject to estate taxes is a candidate to benefit greatly from a CRT.
How does a CRT Work?
A CRT is an irrevocable, tax-exempt trust with two parts: 1) the income interest, and 2) the remainder interest. The income interest is the income paid to the individuals who established the trust (or their designated beneficiaries) for a term of years or for their lifetime. The remainder interest is the money remaining in the CRT when the trust terminates. The remainder interest is given to the qualified organizations (including a family foundation) of the donor’s choice as specified in the trust document.
What are the personal financial benefits of CRTs?
1. Tax-Free Asset Conversion: Through a CRT, appreciated assets may be sold free from the erosion of capital gains. Asset conversion is the most visible financial advantage of using a CRT.
2. Current Income Tax Deduction: A gift to a CRT can provide you with a current income tax deduction that can offset all forms of income.
3. Increased Cash Flow: You may own a highly appreciated asset that generates little or no income, but are reluctant to sell it because the capital gains tax would consume one-fifth of its value and one-fifth of the resulting income. The ability to sell the asset free from capital gain taxes enables a CRT to generate more income for recipients.
4. Lifetime Cash Flow Planning: With careful design and investment management, the CRT can defer income for later distribution. This feature enables possible accumulation of income for retirement planning or for intermittent financial needs that may occur along the way. Income deferral can also enhance the value of the ultimate charitable gift.
5. Retirement Planning and Asset Management: Among other things, retirement denotes reduction of management responsibilities. This may be true not only in the work place, but also with personal assets. The CRT not only provides the means to dispose of management intensive assets, it also supplies a mechanism to provide professional asset management during a person’s later years when it may be most needed or desired.
6. Gift and Estate Tax Planning: The CRT offers you an effective alternative to the payment of gift and estate taxes. Amounts transferred to a CRT are not generally subject to gift or estate taxes. The combination of capital gains, gift tax and estate tax avoidance can be very compelling for those who wish to control their social capital.
In addition to the gift and estate tax saving generated by the trust itself, the cash flow created by the CRT can be coordinated with other estate planning techniques. The most common combination involves gifts of cash from you to an irrevocable trust or directly to family members who then use them to purchase life insurance. Commonly referred to as wealth replacement, the concept often enables you to provide a significant legacy to charity without disinheriting heirs.