Rising prices for investments and real estate is making owners of these assets concerned about paying exorbitant taxes amid discussions of possible changes in the near future. The attorneys at Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, LLC, have daily conversations with clients about these concerns. According to a recent article from The Street titled “Retirement Saving and Charitable Remainder Trusts,” having a strategy on hand to prepare for or even avoid these taxes is a wise move. Is a Charitable Remainder Trust for you?
People who are charitably inclined may want to take a closer look at how Charitable Remainder Trusts, or CRTs, can potentially reduce taxes and provide a generous gift to worthy charities.
There are two basic types of CRTs: the Charitable Remainder UniTrust, or CRUT, and the Charitable Remainder Annuity Trust, or CRAT. In both types of trusts, the charity receives the “remainder” of the principal once the income interest ends.
Income from the trust is given to a non-charity beneficiary for a certain period of time, or as in many cases, for the entire life of the beneficiary until it’s time for the remainder principal to be donated.
The key difference between the CRAT and the CRUT are how the income payment is calculated. In a CRUT with a 5% payout, the 5% is based on the value of the CRUT each and every year. Obviously that payment amount fluctuates according to the performance of the assets held by the CRUT. In a CRAT, payments are fixed based on in the initial contribution made to set up the account. Your estate planning attorney will be able to recommend the right vehicle for you and your family.
A CRT may be funded with highly appreciated assets because selling within the CRT results in no capital gains to the donor. Any proceeds may be reinvested to generate the needed income, while at the same time potentially growing the remainder asset for charity.
An administrator is hired to evaluate the trust to ensure its compliance, and the administrator’s role is to advise the trustee on the amount of the distribution annually to the beneficiary.
Since the charity is the remainder beneficiary, the grantor is not able to deduct the entire amount of the contribution to the CRT. The deduction is determined by the income payments selected and the terms of the CRT. There are software programs used to calculate the approximate deduction based on the input. The higher the income payment, the lower the deduction.
Note that if you are giving highly appreciated long-term capital gains assets, only 30% of the adjusted gross income can be given. The rest may be carried forward for five years. This should be considered when determining how much to contribute to the CRT.
The choice of CRTs lets you design a desired income stream from the trust. The taxability of the CRT is based on the types of assets used. There are four tiers, as defined by the IRS: ordinary income (which includes current year and accumulated income) and qualified dividends; capital gains; other tax-exempt income; and return of principal.
To solve the problem of choosing a charity, many prefer to use a Donor Advised Fund as a beneficiary. The DAF can be treated like a charity for tax purposes. The DAF lets you control how the account is funded and the timing of distribution of assets. The charities do not need to be named when the CRT is first created.
Your head may be spinning a little bit now, but know that the CRT can be a very useful tool in estate planning for people who would be making gifts to support meaningful causes with or without tax benefits.
Your estate planning attorney or Beck, Lenox & Stolzer, if you do not already have an attorney, will be able to walk you through deciding if a Charitable Reminder Trust is for you. He or she can help you set up a CRT to work in tandem with the rest of your estate plan.
Reference: The Street (June 25, 2021) “Retirement Saving and Charitable Remainder Trusts”
