Charitable Planning

Charitable Remainder Trusts

In 1969, Congress created a type of trust that helps charities and not-for-profits generate income while providing a means for wealthy Americans reduce their taxes: the Charitable Remainder Trust (CRT). This trust vehicle benefits your charity or charities of choice while allowing you to reduce estate taxes, create an income tax deduction, eliminate capital gains and benefit charities instead of the IRS.

In a CRT you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income stream by putting the asset into an irrevocable trust. This removes the asset from your estate and gives you an immediate charitable income tax deduction. Because the asset is removed from your estate, no taxes will be due on it when you die.

The CRT names you as the beneficiary of a percentage of income from the asset and for the rest of your life the trust pays you an income. Your chosen charity is the beneficiary of the principal asset upon your death. Therefore, the CRT has two sets of beneficiaries: (1) the income beneficiary (you), and (2) the charity or charities named by you, which will receive the residual trust.

Upon creating a CRT, you set a percentage of income to receive from the CRT for your lifetime. That amount must be a minimum of 5% per year. If you prefer not to take the income in any given year, you may defer the income payments to another year, but eventually the net distributions must meet the IRS’s required minimum of 5% on average.

You then pay taxes only on the money taken out of the trust each year, and no tax is paid on any profits until they are taken out of the CRT. CRT’s work particularly well when you have an asset with a low cost, but high appreciation that would otherwise be subject to capital gains taxes. For example, suppose you have an apartment building you want to sell that is worth $1 million. If you originally paid $250,000 for the apartment building, you would owe capital gains taxes on $750,000. With state and federal capital gains taxes, you could end up losing close to a third of your profits to taxes.

If the apartment building is put into a CRT, the profits are designated to go to your chosen charity, not you, so capital gains taxes are avoided completely. You, your family and your favorite charity all benefit from the full value of any assets being transferred into the trust.

While a CRT is irrevocable, you are the sole manager of the Trust. You can change the charitable beneficiaries at any time, but cannot change any other terms of the CRT.

Because the CRT benefits charity, it qualifies you for an income tax deduction equal to the present value of the remainder interest to the charity. Deductions not used in the year of the contribution can be carried forward for the next five years.

Charitable Lead Trusts

A Charitable Lead Trust (CLT) is very similar to a CRT, but the beneficiaries are reversed: the charity is the recipient of the asset’s income during your lifetime and upon death, your heirs receive the bulk of the CLT’s assets.

The Charitable Lead Trust enjoys the same preferential tax benefits of the Charitable Remainder Trust: It allows you to reduce estate taxes, create an income tax deduction, eliminate capital gains and benefit chosen charities instead of the IRS.