29 May Charitable remainder trusts: What, where, who, why, when, and how?
If you’ve been around foundations over the years, you’ve certainly heard the term “charitable remainder trust,” sometimes called a “CRT.”
For most attorneys, CPAs, and financial advisors, CRTs don’t come along every day. Because a CRT can be such an effective planning tool in certain situations, it’s useful to have at least a basic level of knowledge about how they work.
Here are six important points to keep in mind:
What is it? You establish a CRT as a standalone trust. The trust pays an income stream to you (and potentially other beneficiaries such as a spouse or children) for life or for a period of years. According to the trust’s terms, whatever assets are left when the income stream ends will pass to a charity, such as your fund at the McPherson County Community F
oundation.
Where does the charitable deduction figure in? Because the transfer of assets to the CRT is irrevocable, you are eligible for an up-front charitable income tax deduction in the amount of the present value of the charity’s future interest, calculated according to IRS-prescribed rules and interest rates. Remember also that assets held in a CRT are excluded from your estate for estate tax purposes.
Who is it for? The ideal person to establish a CRT is typically someone who owns highly appreciated assets, including marketable securities, real estate, or closely-held business interests. That’s because a CRT allows these assets to be sold within the trust without triggering immediate capital gains taxes, enabling the proceeds to be reinvested.
Why are some trusts called CRATs and CRUTs? A “charitable remainder annuity trust” (“CRAT”) is a type of CRT that distributes a fixed dollar amount each year to the income beneficiary. You cannot make additional contributions to a CRAT. A “charitable remainder unitrust” (“CRUT”), on the other hand, is a type of CRT that distributes a fixed percentage (at least 5%) annually based on the balance of the trust assets (revalued every year). You can make additional contributions to a CRUT during your lifetime.
When is a CGA a better fit? The tax laws permit a person over the age of 70 ½ to make a once-per-lifetime transfer from an IRA of up to $54,000 (2025 limit) to a CRT or other split-interest vehicle, such as a charitable gift annuity (CGA). This is sometimes called a “Legacy IRA.” Because the cost of setting up a CRT usually means that a $54,000 CRT is impractical, a person who wants to leverage the Legacy IRA opportunity may lean toward a CGA instead.
How can I learn more? As is the case with any question you have about charitable giving techniques, the MCCF is honored to be your first call. We can help you navigate the options and identify strategies that are likely to best meet your needs.
We look forward to working with you!