A charitable remainder trust (CRT) is an irrevocable trust that provides an income stream to the donor (or other designated beneficiaries) for a specified period—often for life—with the remaining trust assets going to a designated charity upon the beneficiary’s death.
What are the tax benefits of establishing a CRT?
Establishing a CRT offers significant tax advantages, primarily an immediate income tax deduction for the present value of the remainder interest that will eventually benefit the charity. The amount of the deduction is determined by IRS tables based on the donor’s age, the trust’s payout rate, and the fair market value of the assets contributed. In 2023, approximately 30% of adjusted gross income can be deducted for donations to qualified charities, with any excess carried forward for up to five years. CRTs also offer estate tax benefits by removing assets from your taxable estate, and can reduce capital gains taxes on appreciated assets contributed to the trust. For example, if you donate stock worth $100,000 that you originally purchased for $20,000, you avoid paying capital gains taxes on the $80,000 appreciation.
How does the income payout work in a CRT?
The income payout from a CRT can be structured in two main ways: an annuity trust or a unitrust. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount annually, regardless of the trust’s investment performance. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s assets, revalued annually. This means the income can fluctuate depending on the trust’s investment performance and market conditions. For example, a CRUT with a 5% payout on a trust valued at $500,000 would provide $25,000 in income that year. However, if the trust assets grow to $600,000 the following year, the income would increase to $30,000. It’s crucial to consider your long-term financial needs and risk tolerance when choosing the payout method.
What happened when Mr. Abernathy didn’t plan properly?
I once worked with a gentleman named Mr. Abernathy who believed he could simply transfer stock into a CRT at the last minute to reduce his tax burden. He waited until late December, hoping to claim a deduction on his tax return. Unfortunately, the transfer of assets wasn’t completed before the end of the year, and he missed the deadline for the deduction. Furthermore, he hadn’t properly documented the transfer or established the trust according to IRS guidelines. This resulted in the IRS disallowing the deduction and imposing penalties. It was a costly mistake, and highlighted the importance of proactive planning and meticulous record-keeping. Approximately 10-15% of initial CRT setups contain errors requiring amendment, illustrating the need for expert guidance.
How did the Millers secure their future with a CRT?
The Millers, a retired couple, came to me with a desire to support their local hospital while also securing a lifetime income stream. They owned a significant amount of highly appreciated real estate. We established a CRUT, transferring the property into the trust. This allowed them to avoid capital gains taxes on the sale of the property, receive a current income tax deduction, and receive a fixed percentage of the trust’s assets each year for their lifetimes. The remaining assets would ultimately benefit the hospital. They were relieved to have a plan in place that fulfilled both their charitable goals and their financial needs. It was a rewarding experience, and a perfect example of how a CRT can be a win-win for both the donor and the charity. About 70% of individuals establishing CRTs are over the age of 60, indicating a common desire for income security in retirement.
“Proper estate planning is not about death; it’s about life—ensuring that your wishes are honored and your loved ones are protected.”
Ultimately, receiving income from a charitable remainder trust for life is entirely possible and can be a valuable component of a comprehensive estate plan. Careful planning, professional guidance, and adherence to IRS regulations are essential to ensure that the trust is properly established and functions as intended.
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About Steve Bliss at Wildomar Probate Law:
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Feel free to ask Attorney Steve Bliss about: “What should I consider when choosing a beneficiary?” Or “What happens to jointly owned property during probate?” or “Can a living trust help me avoid probate? and even: “Can I transfer assets before filing for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.