The charitable remainder trust (CRT), which has been a valuable estate planning tool for decades, has not been forgotten. Currently, the usual 15% tax rate on long-term capital gains is increased to 20% for upper-income investors, while a 3.8% surtax may also apply to a portion of your investment income. Thus, CRTs remain a popular way to shield assets from adverse tax consequences in the wake of the Tax Cuts and Jobs Act (TCJA).
How it works: You transfer appreciated property like a business interest to the CRT and designate a beneficiary to receive income from the trust for life or a period of years. For instance, you might name yourself or your spouse as the income beneficiary of the trust. The beneficiary pays tax on the amounts received from the trust. At the end of the trust term, the property goes to the charity named in the trust documents.
This can accomplish both long-term and short-term objectives. For instance:
- A donor who itemizes deductions can claim a current tax deduction for the value of the remainder interest that passes to the charity. The value of the donation is based on special government tables.
- The donor may also avoid a potentially large capital gains tax on the sale of appreciated property.
- The designated beneficiary can rely on a steady stream of income from the CRT to sustain him or her in retirement.
- The CRT may be combined with a “wealth replacement trust” to achieve additional estate planning benefits.
Suppose the tax savings generated by the CRT fund a wealth replacement trust in whole or in part. The trust can then use the money to purchase life insurance to replace the wealth donated to charity. When all is said and done, your heirs come out even with or ahead of where they would have been if you had not set up the CRT in the first place.
Although there are several variations, the two main types of CRTs are charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). No matter which one you use, the income beneficiary must be entitled to an annual payment each year for life or for a period of no more than 20 years.
With a CRAT, the payment must be a fixed amount at least equal to 5% of the initial value of the trust property, while a CRUT requires payment of a fixed percentage (not less than 5%) of trust assets. In either event, a trust will not qualify as a CRT if the annual payout exceeds 50%. Also, it must be clear that the charity will receive at least 10% of the fair market value of the donated assets.
Finally, be aware that a CRT is irrevocable. In other words, you can’t change your mind and take your assets back. Also, there are fees for establishing and maintaining the trust.
Of course, CRTs are not for everyone, especially in view of other changes in the TCJA. When it makes sense, coordinate this technique with all aspects of your estate plan. Let our Estate Group help you.