HARITABLE REMAINDER TRUST (CRT)

A CRT is an agreement under which a donor transfers a remainder interest in property to a charity in trust. The trust is irrevocable and can be set up to last for a specified number of years (up to 20) or for life.

Purpose
For individuals looking to provide financial support for a favorite charity in their estate plan and reduce estate taxes, a CRT can be an effective tool. The donor can remove property from the estate, provide a lifetime income stream for themselves or other family members, and at the same time benefit their favorite charity(ies).

Process
The trust pays the donor an income stream. At the donor’s death (or the end of the trust term), the remaining assets are distributed to the charitable organization(s) selected. The donor receives an immediate income tax
deduction, as well as a gift tax deduction, at the time of the initial transfer to the trust. The amount of the deduction is determined by several factors, including the length of the trust, the percentage payout and applicable federal rate. The donor will also receive an estate tax deduction for the amounts passing to charity upon his or her death. If the noncharitable income beneficiary of the trust is someone other than the donor or the donor’s spouse, the amount of the income stream may be subject to gift tax liability.

Example
Joe and Jaime, ages 70 and 65, want to set up a CRT that will provide them with retirement income and, at the second death, benefit their favorite charities. They have assets worth $1,000,000 that they place into a CRT. Assuming a 5% lifetime payout and an applicable federal rate of 5.2%, they will each receive $50,000 annually for the rest of their lives. They will also receive an immediate income tax deduction of about $400,700. Their deduction is subject to limitations based on their adjusted gross income, but amounts that are not allowed this year can be carried forward and used over the next five years.

FOR INDIVIDUAL LOOKING TO PROVIDE FINANCIAL SUPPORT FOR A FAVORITE CHARITY IN THEIR ESTATE PLAN AND REDUCE ESTATE TAXES, A CRT CAN BE AN EFFECTIVE TOOL. THE DONOR CAN REMOVE PROPERTY FROM THE ESTATE, PROVIDE A LIFETIME INCOME STREAM FOR THEMSELVES OR OTHER FAMILY MEMBERS, AND AT THE SAME TIME BENEFIT THEIR FAVORITE CHARITY(IES).

Types of CRT’s:
There are two primary types of CRTs: the annuity trust and the unitrust.

• A charitable remainder annuity trust (CRAT) pays the noncharitable income beneficiary a fixed annual dollar amount based on the initial value of the trust property. With the CRAT, the income beneficiary is assured that every income payment will be the same amount. If the investment returns on the trust assets are insufficient, trust principal is invaded to make the payments, reducing the amount that is ultimately received by the charity. It should be noted that additional contributions cannot be made to an existing CRAT once it has been established.

• A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust assets, revalued annually to determine the income payout for that year. As such, the amount of the payment may fluctuate year to year based upon the investment performance within the trust. The trust may provide for payments to be made out of trust income only, or may require a distribution of principal. Additional contributions to a CRUT are allowed. Another variation of the CRUT is the “net income with make-up” unitrust or NIMCRUT. A NIMCRUT’s payments are limited to the lesser of the stated unitrust payout percentage or the net income earned by the trust. Shortfalls may be made up in later years if the trust generates surplus income. This arrangement allows the trustee to utilize various asset allocations to plan and vary income distributions. For example, assets could be invested for growth and minimal income for an income beneficiary who is still in his or her working years, then reallocated to generate additional income during retirement.

Consideration – Life Insurance
If the donor is concerned about reducing the amount that will eventually pass to his or her heirs as a result of a large charitable gift, an option to consider is a “wealth replacement trust.” The donor could use a portion of the income payment from the CRT to fund a life insurance policy on one or both of their lives.