Charitable Remainder Trust (CRT)
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A charitable remainder trust (CRT) may be an estate planning tool that fits well into your financial picture. A CRT is a type of trust generally used to donate appreciated assets to charity and avoid immediate capital gains taxes. Let’s review the basics of a CRT and the benefits it can provide when planning your estate.
Simply stated, a charitable remainder trust is an irrevocable trust that pays annual income to one or more individuals for a specified period of time, after which time the trust terminates and the principal is paid to a charitable organization. The trust could be set up to provide income to you and your spouse for your lives. After your deaths, the charity would receive the trust's assets. The charity could be a university, foundation, church, museum, or any other qualified charitable institution.
Here's how it works: typically, the donor transfers appreciated assets — such as stock, real estate or closely held shares of a business — into the trust on behalf of the charitable organization of the donor's choosing. The trust, in turn, sells the assets and invests the proceeds into high income-producing investments. Since the trust is charitable in nature, it pays no capital gains tax on the profit. The trust then pays the donor an income stream each year (usually for life) and then turns over the principal to the charity upon the donor's death.
If all the requirements are met, there are several tax advantages to this arrangement. First, by giving the asset away instead of selling it, you avoid paying the IRS immediate capital gains taxes (which, under the tax law, may be up to 15% depending upon your tax bracket, the type of asset, how long you owned the asset, and other factors), as well as any capital gains tax levied by your state.
Second, you have available a current income tax deduction, subject to limitations. When you contribute stock to a CRT, for instance, you can deduct a portion of the value of the stock (since the stock won't pass to the charity for several years, the deduction will be less than the stock's current market value).
Third, your estate taxes may be reduced: by making a gift to a charity -- either directly or through a CRT -- the value of the asset plus any future appreciation in its value are removed from your taxable estate, which may ultimately lower your estate tax bill.
CRTs do not entirely escape taxation, however. Depending upon the type of property in the trust, the annual amounts received by the donor from the trustee are generally taxed at either capital gains or ordinary income tax rates.
A CRT may be particularly useful if you hold an investment that has appreciated substantially but throws off minimal yearly returns, such as low-basis stock paying a dividend rate of one or two percent. The trust, as a charitable organization, can sell the stock and reinvest the proceeds to provide you with a higher annual return than you earned on the stock, possibly as high as six or seven percent.
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