3 Tips for Meeting Tax and Philanthropic Goals Through Charitable Remainder Trusts

Tina A. Myers, CFP®, CPA/PFS, MTax, AEP®

3 Tips for Meeting Tax and Philanthropic Goals Through Charitable Remainder Trusts

Combining charitable giving with an ongoing income stream, a charitable remainder trust (CRT) can play an important role in your wealth and estate plan. A CRT is an especially effective way to convert low-basis assets such as stock and real estate into lifetime income, all while generating substantial tax savings and providing support for important causes.

How to Establish a Charitable Remainder Trust

  1. Draft the trust. Work closely with your advisor and attorney to establish a trust framework, and draft the trust documentation.
  2. The person establishing the trust — called the “settlor” — donates assets into an irrevocable trust. Typically highly appreciated stock or real estate that qualifies for long-term capital gains treatment, the assets are removed from the settlor’s estate, giving the settlor an immediate charitable income tax deduction.
  3. The trustee then sells the asset at full market value and re-invests the proceeds. There is no immediate taxable gain on the asset that has been sold.
  4. The charitable remainder trust can give the noncharitable beneficiary payments for life — often the joint lives of a husband and wife — or for a term of years. Children and other parties may also qualify as income beneficiaries.
  5. Upon the death of the beneficiary receiving the trust income or the expiration of the term of years, the remainder goes to the designated charities.

The settlor may also serve as trustee for the CRT. Importantly, as the settlor also has the right to amend the trust to change the charitable remainder beneficiaries and to alter the amount or percentage of the remainder that is distributed to them.

Please note: CRTs are not for appropriate for all individuals or families. In many cases, CRTs are not economically feasible to create for amounts less than $500,000 - $1 million, depending upon individual financial situations. Consider speaking with your advisor about the best potential options, and important considerations to factor for when deciding if a CRT would be appropriate.

Advantages of a Charitable Remainder Trust

  • Avoid immediate capital gains taxes on the sale of appreciated assets. However, future distributions to the income beneficiary may consist of capital gains. Therefore, the taxation of capital gains and not complete avoided, merely deferred.
  • Obtain an income tax deduction for the year in which the assets are placed in the trust.
  • Generate a steady stream of income.
  • Diversify your income sources and reduce risk by replacing a single large investment concentrated asset with a portfolio of investments.
  • Reduce real estate tax liabilities (if the asset transferred to the CRT is real estate).
  • Make significant future contributions to charities that are important to you.
  • Allow for tax-deferred growth, since the income earned within a charitable remainder trust is exempt from current income taxes. From a tax perspective, remember that each distribution from the trust will be subject to taxation.

Details of Charitable Remainder Trusts

While the basics of CRTs are easily understood, these trusts have intricacies that require the expertise of trusted professionals. That said, here are three important steps to take to ensure that you make the most of CRTs.

1. Define your objectives

Any decision you make regarding a CRT — including the decision to establish one — should be made as part of a comprehensive wealth plan. Factors to consider include:

  • Anticipated income for beneficiaries that will be needed from the CRT.
  • Income derived from all sources.
  • Charitable giving objectives, including the causes you wish to support and their qualifications as 501(c)(3) organizations.
  • Investment guidelines, benchmarks, and vehicles for assets invested in the CRT.
  • Estate planning objectives and what you wish to transfer to your heirs.
  • Taxes, including real estate.

2. Select optimal assets for the CRT

You may use a wide variety of assets for a CRT, including publicly traded securities, unmortgaged real estate, and private company — but not S-Corp — stock. Cash may also be used.

As mentioned earlier, a low-basis asset that has appreciated significantly can be especially attractive for funding a CRT. Holding a significant portion of a family’s wealth in one or a few assets is risky, but selling the asset and reinvesting the proceeds would result in a sizable capital gains tax. And while making a big donation to a favorite cause may be an important goal, ensuring that there’s an ongoing income stream to sustain family members for the future is also a critical consideration. In this situation, a CRT may be the perfect solution to meet your overall income, tax, and philanthropic objectives.

3. Determine income recipients and the appropriate type of CRT

Trust income can be paid to you or any beneficiaries for over a lifetime or, if you choose, for a term of years (not to exceed 20). Married couples may select payments for as long as either partner lives. The income may also be paid to your children over their lifetimes or to other parties. However, the remainder actuarial value must be more than 10% of the initial contribution, and the minimum payout rate is more than 5%, so when accounting for assumed lower interest rates, younger age beneficiaries may not qualify for receipt of income.

After determining who the income recipients will be, you’ll need to decide on the type of CRT:

Charitable remainder unitrusts (CRUTs) distribute a fixed percentage of trust assets. The amount of your annual income will fluctuate, depending on investment performance and the value of the trust, which is revalued at the beginning of each year. Additional contributions can be made.

Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year — your income will not change regardless of the trust’s performance. Additional contributions are not allowed.

With a unitrust, the amount of your income will increase if the assets grow. While an annuity trust does not provide inflation protection and the opportunity for higher income, many older beneficiaries prefer the income predictability that CRATs offer. With both types of CRTs, the annual payout rate stated in the trust cannot be less than 5% or more than 50% of the initial fair market value of the trust’s assets, according to IRS requirements.

Learn More About Charitable Remainder Trusts

A CRT can enable you to make substantial donations to your favorite charities while allowing you to achieve important tax and income goals. To ensure that you are meeting the necessary requirements and that a CRT is integrated with your overall wealth plan, you must work with objective, independent experts to create and fund the trust.

Tina A. Myers, CFP<sup>®</sup>, CPA/PFS, MTax, AEP<sup>®</sup> Biopic

About Tina A. Myers, CFP®, CPA/PFS, MTax, AEP®

As a senior financial planner with Key Private Bank, Tina offers her clients sophisticated financial planning advice and a comprehensive set of strategies to grow and preserve their wealth. She collaborates with her team’s Relationship and Portfolio Managers, coordinates strategies with attorneys and accountants and follows up on a regular basis to ensure the plan is performing optimally. Tina received the 2016 Exceptional Service Award from the Cleveland Estate Planning Council and 2016 Circle of Excellence Award by Key Private Bank.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

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