Charitable Remainder Trusts

Charitable remainder trusts (CRTs) can be great solutions for clients who want to gift assets to a nonprofit organization while providing income to themselves and their loved ones during their lifetimes.

Here are the basics on CRTs and the benefits they can provide to your clients:

What is a CRT?

A CRT is an irrevocable trust that pays an income stream to one or more beneficiaries for a set period. At the end of that period, any remaining assets in the CRT pass to the nonprofit organization designated by the person creating the trust. For example, a client could establish a CRT paying income to herself and her children during their lifetimes, with the remainder being paid to a fund at her local community foundation.

What are the benefits of establishing a CRT?

1. Income Tax Benefits. Since the transfer of assets to a CRT is irrevocable, clients establishing CRTs are typically eligible to take a charitable income tax deduction at the time they fund the trust. The amount of this deduction is equal to the present value of the charity’s future interest in the trust assets, and is calculated according to IRS-prescribed rules and interest rates.

CRTs can also provide clients with the opportunity to defer gain recognition on highly appreciated assets. If a CRT sells highly appreciated assets, capital gains tax is generally not triggered until the proceeds are distributed. This allows the CRT to reinvest the full amount of any proceeds it receives.

2. Estate Tax Benefits. Because the transfer of assets to a CRT is irrevocable, clients creating CRTs will typically be able to exclude the value of those assets from their estate for estate tax purposes.
3. Charitable Giving Benefits. Clients establishing a CRT during their lifetime can achieve their goal of making a legacy gift to their selected nonprofit organization while still providing for themselves and other beneficiaries during their lifetimes.

What types of CRTs are available?

There are two main types of CRTs – charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). CRATs distribute a fixed dollar amount to the trust’s income beneficiaries each year. CRUTs distribute a fixed percentage of the asset value (totaling at least 5% annually) to the trust’s income beneficiaries each year. While clients can make additional contributions to a CRUT during their lifetime, they cannot make any additional contributions to a CRAT.

What is the difference between a CRT and a Charitable Gift Annuity (CGA)? 

CRTs and CGAs both give clients the opportunity to make a legacy gift to their selected nonprofit organization while receiving payments during their lifetime. However, CRTs are standalone trusts, while CGAs are annuity agreements entered into by a donor and a nonprofit organization. Since creating a CRT requires legal expertise and customized drafting, the cost associated with creating a CRT is usually higher than the cost associated with establishing a CGA.

What types of clients would be the best fit for a CRT?

While each client’s situation is different, clients who are good candidates for a CRT usually have the following attributes:

• They would like to create a legacy benefitting certain charitable causes.
• They have highly appreciated assets and are interested in seeing those assets diversified in a tax-efficient manner, even if it means relinquishing control over them.
• They would like to receive income for themselves or their beneficiaries over a period of time.
• They have a taxable estate.
• They are comfortable engaging in more complex estate and gift planning.

Need additional assistance?

If you or your clients have additional questions about making gifts to MCF, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.