What is a Charitable Remainder Trust?

Are you looking for a retirement income stream while wanting to avoid capital gains on a highly appreciated asset? If so, a Charitable Remainder Trust may be right for you.

A Charitable Remainder Trust—or CRT—allows you to donate appreciated assets to an irrevocable trust and convert them into reliable income for a lifetime or just retirement.

But why is it called a charitable remainder trust? Because the remainder of the trust—what’s left over—goes to charity at the end of the set term. You receive an income from the distributions with the understanding that at the end of the day, the rest of the account is designated to the charity of your choice.

You may be asking, “Is a Charitable Remainder Trust the best option for me?”

Who is Eligible for a CRT?

This option is ideal for people who:

• Own appreciated assets. You need to have an asset that is highly appreciated to see a lot of benefit from this type of trust. Once you donate the asset to the CRT, it will be sold and reinvested, so it needs to be worth enough for you to live off the gains.
• Want tax benefits. Ideal candidates for a CRT are typically looking to remove taxable income or reduce their taxable estate.
• Are charitably inclined. CRTs are a great way to make a difference and leave a charitable legacy.
• Need a new income stream. This is the clincher for those who will most benefit from a CRT versus other ways to give to charity.

Benefits

Here are the main benefits of a CRT:

• Charitable income tax deduction. Donating to your CRT qualifies you for a charitable income tax deduction for that year based on the present value of the assets. Because the asset was sold under the trust, it reduces or eliminates your estate taxes, and the sum is out of the reach of creditors for the life of the account.
• Capitalize on investment gains. This strategy can potentially allow you to receive more income over your lifetime than if you single-handedly sold the asset yourself and reinvested the funds. Why? When you donate the asset to the CRT and then it’s sold, no capital gains tax is taken out. The whole amount is reinvested into income-producing assets to create an income stream. So from the get go, the CRT invests more than if you sold it yourself and had been subject to capital gains.
• Retirement income stream. If you’re not yet retirement age, you can structure the CRT to defer the payment stream until retirement—providing an additional income source you may not have considered in your later years.

How to Open a CRT

How would you open a CRT?

1. Identify which appreciated assets you’d like to donate to the trust.
2. Choose your beneficiaries. Most donors designate themselves as the income beneficiary.
3. Check with the charity or nonprofit you’ve chosen to benefit from the trust to make sure that a CRT aligns with their donation preferences and options.
4. Work with a professional like an estate planning attorney or financial advisor to draw up a trust document. It’s critical that you choose a professional with previous CRT experience.
5. Transfer the asset into the CRT, removing it from your estate. You receive a charitable income tax deduction, and the trustee sells the asset and reinvests it.
6. Receive your distributions. You can choose to receive your distributions in one of two ways:
   • Fixed payments. You receive a fixed amount yearly. This provides security and consistency—but doesn’t necessarily protect you from inflation over time.
   • Fixed percentage. Your income stream fluctuates based on the investment performance. The benefit of this option is that your income amount will grow as the value of the trust increases, but you’ll also receive less if the investment value decreases.

Limitations

There are some limitations you’ll need to be aware of if you’re interested in opening a CRT:

• Distributions are taxable. Whichever payment option you choose, distributions paid out of the CRT are taxable. You do receive an immediate tax deduction when the CRT is funded, but it ends there. The benefit is that the taxes are paid over time based on the value of the distributions rather than in one lump sum if you had sold the asset on your own.
• Irrevocable trust. Once you’ve signed on the dotted line, there’s no going back. Once you create it, you can’t change or modify it.
• Negative charitable impact. You may risk leaving nothing to your charity if you plan to receive high payments from the trust while you’re alive.

Summary

CRTs aren’t for everyone.

If you think this trust would add value to you and your family, seek professional assistance to make sure it meets your needs and will give you the results you’re looking for based on the assets you own. For some people, moving their assets into an estate or pairing the CRT with a donor advised fund (DAF) may be the better option. Set up a meeting with an estate planning attorney, insurance professional, corporate trustee, investment adviser, CPA, or your favorite charity to discuss. Because the remainder of the trust goes to one or more charities at the end of the term, a CRT can help you leave a lasting charitable legacy to causes you care about. As Galatians 6:10 says, “So then, as we have opportunity, let us do good to everyone, and especially to those who are of the household of faith.”