Guide to Charitable Remainder Trusts | Adviser Investments

Guide to Charitable Remainder Trusts

A group of people getting ready for charity
Charitable bequests can reduce your taxable estate, but what if you need a taxable deduction now? That’s where a charitable remainder trust comes in.

A charitable remainder trust (CRT) enables you to support your favorite charitable causes while still benefiting from your assets during your lifetime. Below, we’ll dive into the details, answer some common questions, and look at the benefits and potential drawbacks of this useful tool for building a lasting legacy. Earn an income, reduce your tax burden and benefit a cause you care about—there are plenty of positives, but there are also complexities and pitfalls. Read on.

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What Does a Charitable Remainder Trust Mean?

A charitable remainder trust is an irrevocable trust that potentially reduces your taxable assets and generates a predefined income stream for you or other beneficiaries, with the remainder of the donated assets going to your favorite charitable cause at a specified time in the future.When you transfer cash or other assets into a CRT, you gain an immediate income tax charitable deduction based on the current value amount in the trust that will ultimately go to the named charity.

Tip: Adviser’s financial planners explain why cash is always king with charities, as well as and five giving strategies, including split-interest charitable trusts and private foundations. Download the complimentary report, Making the Most of Your Charitable Giving.

Charitable Remainder Trust Examples

There are two primary types of charitable remainder trusts: A charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT).

A CRAT is an irrevocable trust that provides the donor with a fixed income stream for either a predetermined term or the life of the beneficiary. The income? A fixed percentage of the initial contribution that is set when the trust is launched. At the end of the trust’s term or when the beneficiary passes, all remaining assets go to the designated charitable organization.

A CRUT is another type of irrevocable trust—one that provides the donor with a variable income stream based on the value of the trust assets. This income, revalued annually, is typically based on a fixed percentage of the trust assets’ value. At the end of the term or when the beneficiary passes away, the remaining assets are sent to the assigned charity.

How Does a Charitable Remainder Trust Work?

For a CRAT, the income payment is typically calculated as a percentage of the value of the assets contributed to the CRT, as the asset is valued on the date of the contribution—income payments are made annually, quarterly or monthly.

As an example, let’s say you create a CRAT that pays out a 5% annuity annually, based on $500,000 in stock contributed at the creation of the CRT. The annuity payment of $25,000—no more, no less—arrives at the end of the year for the rest of your life, with the remainder going to your preferred charity when you pass away.

With a CRUT, your annual payment will vary depending on the investment performance of the underlying assets. Let’s say you contribute $500,000 in assets and have the same 5% annual payment schedule. The payment is determined by the value of the CRUT assets on the first business day of the year. If the CRUT assets are worth $500,000 on Jan. 2 of a given year, you receive $25,000 on Dec. 31. If strong investment performance causes the CRUT assets to go up to $525,000 on Jan. 2 of year two, you receive a $26,250 payout. (Of course, you’re taking the risk that payment will be lower if the investment did poorly in the previous year.)

What Are the Benefits of a Charitable Remainder Trust?

Let’s look at some benefits of charitable remainder trusts:

Tax benefits. CRTs offer numerous tax benefits, including immediate income tax deduction for the value of the remainder interest, avoidance of capital gains taxes on appreciated assets, and the potential for reducing your estate taxes. In terms of getting the greatest tax benefits out of a CRT, the more highly appreciated the asset, the better. As an example, a CRT would be a good fit if you have a highly concentrated position in one stock. Starting a CRT using that stock allows you to diversify out of that position more tax efficiently than if you were to sell the stock over time and incur a big capital gains hit at every sale.

Income stream. In creating a CRT, you are ensuring a reliable income stream for yourself as well as any other named beneficiaries during your lifetime. This can be especially attractive during periods when interest rates are relatively high, like they are today.

Philanthropic legacy. With a charitable remainder trust, you enjoy the satisfaction of supporting the worthy charities you care about and knowing that you’ll be making a difference even after you’re gone.

What Are the Drawbacks of a Charitable Remainder Trust?

CRTs offer numerous benefits, but they aren’t for everyone. It’s wise to consider these downsides that may apply to you:

Drawbacks of charitable remainder trusts

How Do I Establish a Charitable Remainder Trust?

We’re happy to help you establish a charitable remainder trust. Here is the general process, though of course everyone’s unique situation and needs must be considered on a case-by-case basis.

  1. Decide on your charitable intent. Choosing the charity or cause you’d like to support is a good place to start.
  2. Find professional assistance. Experienced wealth managers can help you coordinate with estate planning attorneys and align your CRT with your overall financial plan. A financial advisor can help you structure the trust, select the appropriate assets, and make sure the legal and tax implications are sound.
  3. Choose the trust type. Will you opt for a CRAT or a CRUT? You’ll want to consider income requirements, risk tolerance and need for flexibility in making this decision.
  4. Fund the trust. This is when you’ll contribute assets such as cash, stocks, real estate or other highly appreciated assets to the trust. These are the assets that will generate income for you and/or your beneficiaries during the term of the trust.
  5. Designate the remainder. Determine how the remainder interest will be distributed among one or more charitable beneficiaries.

Who Manages the Money in a Charitable Remainder Trust?

Charitable remainder trusts are managed either by you (the person establishing the CRT), by a beneficiary of the CRT, or by an appointed independent individual or institution (a bank or trust company).

This person or entity is required by the terms of the trust agreement to act in the best interests of the donor and the intended beneficiaries. Responsibilities include making appropriate investment decisions, overseeing the assets effectively, and making sure that any activity remains within the bounds of applicable laws and regulations.

While it is certainly possible to name yourself or a spouse as your CRT’s trustee, sometimes it’s beneficial to you to select an independent trustee. This would be someone who doesn’t stand to benefit from the assets contained in the trust. In a situation where beneficiaries include family members who may be prone to disagreements, or a minor who is not ready to handle the responsibility, it often makes sense to appoint a third-party trustee.

How Many Beneficiaries Can a Charitable Remainder Trust Have?

The number of beneficiaries in a charitable remainder trust is unlimited, but as the setup gets more complicated, the trust can become more challenging to administer and human emotion can potentially become a bigger part of the picture. It’s also worth considering that the more beneficiaries you include, the more the assets are split and the faster the money runs dry.

And keep in mind that CRTs are irrevocable—the beneficiaries you choose when establishing it will be the beneficiaries that remain over the course of the trust. While adding or changing beneficiaries may be possible if your designated charity undergoes an alteration or ceases to exist, we generally advise that beneficiary designations are otherwise set in stone at the creation of the trust.

We strongly recommend consulting with experienced professionals to help determine the CRT beneficiary structure that will best suit your wishes and needs.

How Long Does a Charitable Remainder Trust Last?

A CRT’s duration varies depending on the terms laid out in the trust document. Remember, a charitable remainder trust is a legal arrangement that provides income to you and/or your designated beneficiaries for a specified period. Once that period elapses, the remaining assets are transferred to the charity or foundation of your choosing.

The duration of the charitable remainder trust can take several forms:

  1. Term of years. The trust can be set up to last a specified number of years—for example, structured to provide income to you and/or your beneficiaries for 10, 20 or 30 years.
  2. The trust provides income to you and/or your beneficiaries for life. Upon your passing or that of your beneficiaries, all remaining assets go to your predetermined charity.
  3. Joint lives. In this case, a CRT is structured to provide income to multiple individuals (think a married couple) for the rest of their lives, with the remaining assets going to a designated charitable organization upon their deaths.

Note: Assets in the CRT must remain above 10% of the initial asset contribution for beneficiaries to continue receiving payments for life.

Does Adviser Think Charitable Remainder Trusts Are Worth It?

In addition to its philanthropic value, a CRT can provide major tax and estate planning benefits for certain high-net-worth individuals. Our general rule is that a CRT doesn’t really make sense unless you’ve got at least $500,000 of a highly appreciated position that you’re able to establish the CRT with—and remember those drawbacks we discussed above.

With elevated interest rates, our first instinct at Adviser is to think about the effect on a client’s portfolio. And this is one time when CRTs can really be worth your while—they are especially attractive when interest rates are relatively high.

When you transfer cash or other assets into a CRT, you receive an immediate income tax charitable deduction based on the present value in the trust whose remainder will eventually end up going to the named charity. The value of the remainder going to charity is determined by interest rates when the trust is initially funded. Ergo, the higher interest rates are, the higher the value of the remainder interest and the greater the immediate tax deduction when funding the trust. In addition, since the CRT pays out required minimum income, higher interest rates make it easier to meet that minimum payment and extend the life of the trust.

Don’t hesitate to contact us to discuss your legacy as well as your current needs and objectives. We’re happy to help you explore whether a charitable remainder trust may be the right fit for you.

And for more philanthropic planning tips, visit our Charitable Giving & Tax Strategies Information Center.

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.
Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.
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