For those with highly appreciated assets and a desire to receive an income stream while mitigating taxes and supporting a charitable organization, a charitable remainder trust (CRT) might be the solution. A CRT is a “split-interest” giving arrangement, allowing philanthropically minded people to support their charitable goals, yet they or their beneficiaries receive income from the trust. Once the distributions to the income beneficiaries terminate, the amount left in the trust goes to the designated charity.
As CRTs are irrevocable and tax-exempt, they can also be part of a tax reduction strategy. A donor establishes a CRT with a donation of appreciated asset(s). The donor is eligible to take a charitable income tax deduction for the value of the remainder interest in the trust that will pass to the charity. Because the CRT is tax-exempt, no capital gains taxes are incurred when the CRT sells the appreciated asset(s). The income beneficiaries are subject to income tax only on the distributions they receive.
The money in the CRT is invested, allowing it to grow tax-free. Distributions to the income beneficiaries are made at set intervals (annually, semiannually, quarterly, or monthly) for a defined period of time (a term of years up to 20 years or for the life of the named income beneficiaries) and can be used as they see fit.
Types of Charitable Remainder Trusts
There are two main types of charitable remainder trusts from which to choose based on the donor’s goals: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). Both trusts involve an irrevocable contribution of cash or property, payments to the donor or named beneficiaries, and distribution of the remaining funds in the trust to the designated charity after the payments to the individual beneficiaries terminate.
How CRATs and CRUTs differ:
|Charitable Remainder Annuity Trusts||Charitable Remainder Unitrusts|
|Contribute once, no additional contributions allowed||Contribute to establish, additional contributions allowed|
|Distributes payments of a fixed dollar amount each year||Distributes payments based on a fixed percentage of the trust asset balance valued annually|
What are some examples of assets that may be used to establish a charitable remainder trust (CRT)?
- Publicly traded securities
- Some types of closely held stock (Note that CRTs cannot hold S-Corp stock)
- Real estate
- Qualified Charitable Distributions (QCDs) (Only in specific instances)
New Legislation Allows Taxpayers to Fund a Charitable Remainder Trust from a Qualified Charitable Distribution
Beginning in 2023, new legislation allows a taxpayer (aged 70 ½ or older) to make a one-time, qualified charitable distribution (QCD) up to $50,000 to a newly established charitable remainder trust (CRT). It is important to note that the newly created trust must still meet the IRS requirements for a CRT, even though an income tax charitable deduction will not be allowed for the QCD.
These new rules also prohibit a CRT funded with a QCD from receiving any other type of asset and only allow individuals to use this planning tool once. Given these limitations, this new opportunity may be most appealing to a charitably inclined couple (aged 70 ½ or older) because each spouse can contribute up to $50,000 from their respective IRAs and commingle the funds in a single CRT (for a combined CRT total of $100,000).
For CRTs funded by QCDs, only the IRA owner and his or her spouse are eligible to receive income payments from the CRT. Children or other individuals cannot be named as income beneficiaries like with other CRTs.
While the new legislation comes with limits, it creates an additional opportunity for charitably inclined individuals who are looking to use their retirement assets to support their favorite charities while still generating an income stream for their expenses.
Charitable Remainder Trusts Are More Attractive When Interest Rates Are Rising
To qualify as a charitable remainder trust, the IRS requires that the remainder interest for charity be at least 10% of the initial fair market value of the property placed in the trust. Several factors impact this calculation, including the IRC Section 7520 rates. The higher the 7520 rate, the higher the value of the charitable remainder interest and the likelihood that the trust will meet IRS standards to qualify as a CRT.
Using Our Charitable Remainder Trust Calculator to Estimate Tax Deductions, Annual Payments, and More
Understanding the benefits of a CRT in theory is one thing, but seeing how the numbers might work out is another. Greater Horizons offers a gift calculator for split-interest gifts, letting users quickly calculate how these charitable gifts may affect income and taxes. The calculator can be used for several types of split-interest gifts, including:
- Charitable Remainder Annuity Trust
- Charitable Remainder Unitrust
- Charitable Gift Annuity
- Deferred Charitable Gift Annuity
- Charitable Flip Unitrust
- Retained Life Estate
- Charitable Lead Annuity Trust
- Charitable Lead Unitrust
The calculator estimates the potential income tax charitable deduction based on the gift’s value, the expected payments to the individual beneficiary(ies) and the time horizon for those payments.
Use the calculator to personalize a charitable remainder trust scenario.
Consider Naming Your Donor-Advised Fund as the Remainder Beneficiary of a Charitable Remainder Trust
Donors who choose to establish a CRT often use their donor-advised fund to carry out their charitable goals after the CRT completes its payments to the individual beneficiaries. You may name your donor-advised fund as the remainder beneficiary of a CRT. To do so, the trust agreement should list Greater Horizons (EIN: 20-0849590) for [the name of your donor-advised fund] as the remainder beneficiary.
Greater Horizons can also trustee a charitable remainder trust in some situations. Please contact us if you are interested in Greater Horizons serving as trustee. Please note, Greater Horizons requires both a minimum CRT size of $250,000 and naming your Greater Horizons donor-advised fund as the remainder beneficiary to serve as trustee. Greater Horizons cannot draft the trust agreement to establish a CRT; you will need to engage independent counsel to assist with that process.
Interested in learning more?
If you would like more information about using charitable remainder trusts to generate an income stream while mitigating taxes and supporting charitable causes near to your heart, contact our team at Greater Horizons today.