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Estate Planning Idea: Charitable Remainder Trusts (CRTs)

Greg A. Raffaele CPA CVA FCPA

As part of the tax code in the late 1960s, Congress created Charitable Remainder Trusts (CRTs or 'trusts') as tax-exempt, legal entities to encourage taxpayers¹, called donors or grantors, to transfer assets such as real estate or stock to charities and foundations. CRTs, which are created for life or a specific period, have numerous benefits and a degree of financial planning flexibility. A CRT could be a key part of a successful and properly designed charitable and estate plan. A donor should consider creating a CRT if he owns an asset(s) that he does not want, need or is hesitant to sell because:

• It does not produce or produces mininal income
• It is too concentrated (i.e., not a diversified portfolio)
• It takes too much time and effort to manage
• It would create a significant tax liability if transferred in any way
• It has sentimental value to the family

Through a properly designed CRT, a donor can enjoy:

• Increased Income: The income received by the donor and his beneficiaries is increased when the trust sells low or 'zero' income assets, such as raw land or a low dividend stock and buys higher income assets. The additional income can buy life insurance owned by a life insurance trust. The death benefits from the insurance pass tax-free to the donor's beneficiaries, replacing the value of the assets contributed to the trust.


• Diversified Income: By having the trust diversify from concentrated assets to a portfolio of assets, the donor has consistent income and less volatility in his investments.


• Professional Management: A donor can have his portfolio professionally managed.


• Tax Savings: A CRT provides the following tax savings: income tax, capital gains tax and estate and gift tax. The tax savings can also buy life insurance owned by a life insurance trust so that the death benefits from the insurance pass tax-free to the donor's beneficiaries replacing the value of the assets contributed to the trust.


• Income Tax: The donor of an 'inter vivos' or 'living' trust (a trust created while the donor is alive) receives a Federal income tax charitable deduction equal to the present value of the asset. To be deductible, contributions must be made to organizations considered charities under Internal Revenue Code (IRC) 501(c)(3). Contributions to most foreign charities, however, are not tax deductible. The deduction also depends on the amount of income or the percentage of principal paid annually by the trust, the age of those receiving trust income and the discount rates set monthly by the IRS².


• Capital Gains Tax: Assets contributed to the trust can be sold by the trust without any capital gains taxes to the donor. This is beneficial when the donor has highly appreciated assets, such as stocks, bonds, mutual funds, real estate, collectibles or artwork that were purchased or inherited. Tax regulations allow a tax deduction based on the asset's fair market value, so the grantor avoids paying capital gains tax by deducting the increase in value over the asset's cost.


• Estate and Gift Tax: Taxable assets removed from the donor's estate and contributed to a trust are not subject to Federal estate and gift taxes, which can be as high as 55 percent. The donor of an inter vivos trust receives a gift tax deduction equal to the fair market value of the asset. The donor of a testamentary trust, which is a trust created within a will that does not take effect until the donor's death, also receives an estate tax deduction equal to the fair market value of the asset at his death.


• Creditor Protection: Assets in a properly written CRT are protected to the extent the law allows from future creditor claims.


• Legacy or Endowment: Without giving up lifetime income, a donor can contribute or endow to his favorite charity or foundation. The donor's children or other family beneficiaries can often manage a trust connected to testamentary family foundations.

There are various types of CRTs, each with the flexibility to enhance an estate plan by designing it around a donor's circumstances and wishes. A donor needs a financial advisor to guide him in selecting and creating the most appropriate trust. The two main types of CRTs are the Charitable Remainder Unitrust (CRUT) and the Charitable Remainder Annuity Trust (CRAT). These trusts pay income to the donor and his beneficiaries and, upon their death, the remaining asset or 'remainder interest' in the trust goes to the named charities or foundations. The trustee generally pays all trust income, versus an increase in the trust's asset value, the year it is earned. These organizations, considered charities by IRC §501(c)(3), include churches, not-for-profit universities, hospitals and the grantor's family foundation. The donor has the right to change the named charities anytime during his life or by will at death.

CRUTs pay a percentage of its assets' fair market value every year as income to the donor or his beneficiaries. This income, which varies based upon the assets' value, is called the 'unitrust' amount. The trust assets are valued annually and the donor selects the percentage, which is at least five percent, when he creates the trust. The donor can make as many contributions as he wants. Following his death and the death of his beneficiaries or at the conclusion of the term specified by the donor in the trust, the 'remainder interest' goes to the named charities or foundations. The Net Income Make-Up Unitrust (NIMCRUT) is a popular type of CRUT that pays the lesser of the actual trust income or the 'unitrust' amount annually. If the actual trust income exceeds the 'unitrust' amount in the future, the excess income is paid to the income beneficiary to the extent that he did not receive the full unitrust amount earlier.

CRATs pay a fixed dollar amount or 'annuity' amount each year to the donor or his beneficiaries. The annual payment must be at least five percent of the initial fair market value of assets in the trust. The income continues for the life of all beneficiaries or for a specific term not to exceed twenty years. The 'remainder interest' then goes to the named charities or foundations. Unlike CRUTs, the CRATs allow only one contribution.

Not everybody is a candidate for a CRT. Age, net worth, future income and financial and charitable goals must be considered. How and to whom the gift is made must also be considered. Though the basic charitable trust document looks simple, the complexity is in the plan's design, which includes the selection of appropriate trust assets. The donor must be aware of the intricacies and complexities of charitable contributions, so it is important that he select a financial advisor that is well versed in the design, creation, funding and operation of a CRT. The advisor should help the donor consider a variety of assets and whether they are appropriate in certain types of charitable trusts. Selecting a trustee with specific experience and expertise administering CRTs so that the trust will remain qualified and continue to meet the donor's financial and charitable goals.

Other than in CRTs or other tax-favored maneuvers, valuations by a CVA (or other valuation analyst) are important in financial, tax and litigation matters.

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