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A Charitable Remainder Trust (CRT) is an irrevocable trust that generates income for you or your beneficiaries with the remainder going to your favorite charity. It allows you to make a partially tax-deductible gift to charity while continuing to receive income from these assets today to support your retirement or estate planning goals.

 

How Charitable Remainder Trusts work

Charitable remainder trusts can be a great way to meet current income and tax needs today while making an impact on causes you care about tomorrow.

There are two primary types of trusts that differ based on how they pay income to you.

  • A Charitable Remainder Annuity Trust (CRAT) pays a fixed amount each year.
  • A Charitable Remainder Unitrust (CRUT) pays a percentage of the trust balance each year.

CRTs work in three steps.

  1. Make a partially tax-deductible gift to the CRT. You can give a wide range of assets including:
    • Cash
    • Stocks, bonds, and other publicly traded securities
    • Real estate
    • Some closely held business interests
    • Certain other assets
  1. You and/or your beneficiaries receive income during your life. This amount varies based on the type of trust you choose and the income term, which can be for life or a fixed number of years.
  2. At the donor’s death, the charity receives the remaining trust balance.

A CRT can provide a balance of income, estate and tax benefits today for the charitably minded. It’s important to remember that, while there is initial flexibility in determining the income amount and length, a gift to a CRT is permanent, or irrevocable, so assets can’t be withdrawn later on.

 

Benefits

The substantial tax benefits, increased asset efficiency, and improved long-term planning for things like business succession make CRTs a great tool for charitable people looking to balance benefits today with charitable impact tomorrow.

Tax Benefits

CRTs and the tax law governing them have been around for a long time. Because they are well-established with the IRS, they shouldn’t increase your audit risk when done correctly. You will need to work within boundaries governing how much you can take out, but your strategic advisors can help you find freedom within these parameters. CRTs provide two key tax benefits:

  • Income tax deductions today. You’ll receive a partial tax deduction when you make your contribution.
  • Exemption from capital gain and other investment taxes. When funding the trust with highly appreciated assets, you’ll avoid capital gain taxes you otherwise would have paid when you sell. Your ongoing investment income and gains are also tax exempt.

If you leave $1 million to charity in your will, your gift starts and ends there. A CRT, on the other hand, provides a similar future gift, but adds income to you during your life and a tax deduction today, which can then be given to charity, gifted to family members, or used to enhance your retirement goals.

Asset Efficiency

A CRT is a great way to maximize the impact of some highly appreciate assets. If you have $1 million in highly appreciated stock and decide to sell it, you might only yield $760,000 after capital gain taxes – a sizable bite out of your proceeds. Gifting that same $1 million in stock to a CRT allows you to sell the stock without paying capital gain tax, provides a tax deduction, and generates income that can be given to family.

One way to accomplish this is by using the CRT income to fund a Wealth Replacement Trust, which is paid out to your family at your passing. In some cases, we’ve seen this combination of strategies turn what would have been a $1 million charitable donation into an almost $2 million total impact.

Long-Term Planning

CRTs can also be used in long-term planning for business succession or during the sale of a business. Including a CRT in your company’s long-term plan can create a way to grow your business while taking advantage of tax breaks, creating current income today and doing good in the community.

For example, if you built a $20 million business from the ground up, you’d might receive around $15 million after taxes if you sold all at once. However, assuming you don’t need all $15 million today, let’s assume you put half of the business into a CRT and then sell. Proceeds from ownership gifted to the CRT would now grow tax deferred, provide a potential $500,000 annual income during your life and pass the remainder to charity. You’ve mitigated your tax risk on the front end, created a revenue stream, and given a large potion to charity as a legacy!

 

Drawbacks

For all the advantages of a CRT, there are also some drawbacks.

Permanence

The main drawback to a CRT is that it’s irrevocable. Gifts to a CRT can’t be reversed regardless of changes in your situation, so you’ll want to carefully consider this in your planning. It also reduces assets that would otherwise be left to family, which is why it can be effectively paired with a Wealth Replacement Trust.

Administration Costs

CRTs can be costly to create and administer. As a result, opening a CRT may not make financial sense for gifts less than $500,000 or so. CRTs require attorneys to draft the documents, CPAs to manage the tax implications, and financial planners to manage the assets. Legal fees alone can be $5,000-15,000 upfront. However, this is not the place to cut corners. Assembling the right team of professionals is crucial because the strategy rests on IRS-compliant set up and administration.

 

Charitable Goals

It might seem obvious, but a CRT should be created primarily for the purpose of making a charitable contribution. CRTs are sometimes inappropriately presented solely as a tax shelter strategy. But if you’re solely looking to avoid paying taxes on assets without a charitable component to your legacy goals, you should look elsewhere. Ultimately, the amount you and your heirs end up with will likely be smaller after the charitable contribution than it would have been after paying taxes. Of course, as previously mentioned, the overall impact can be increased by pairing with other strategies.

 

Is a CRT right for you?

There are many ways to structure your charitable giving, so talk it over with your advisors to determine if this fits with your planning strategies and goals. With proper coordination, a CRT can be a powerful way for the charitably inclined to balance income and tax benefits today with impact on causes you care about tomorrow.

Alterra Advisors - Josh Whelan

Zach Hamilton

Financial Advisor

About the Author

Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.

Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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