Charitable Remainder Trusts: A Guide to Giving Back While Potentially Reducing Income Tax and Estate Transfer Taxes
As we plan for our financial future, many of us want to ensure that our hard-earned assets will make a lasting impact.
Charitable Remainder Trusts (CRTs) provide a unique way to do just that—offering both a means to support loved ones and the causes you care about, with potential tax benefits that make this giving strategy even more powerful.
As you may know, the Tax Cuts and Jobs Act will sunset at the end of 2025 if the new administration does not implement an extension of any sort. The present lifetime gift and estate tax exclusion is $13.61 million for an individual and $27.22 million for a couple. If the Tax Cuts and Jobs Act sunsets at the end of 2025, that limit will be reduced to around $7 million for an individual and around $14 million for a couple.
This strategy could be a very effective way to utilize some of that elevated estate tax exemption and fulfill your charitable giving wishes before it is reduced! Here's what you need to know about CRTs, how they work, and how they can fit into your financial and estate planning.
What is a Charitable Remainder Trust?
A Charitable Remainder Trust is a type of irrevocable trust that allows you to donate assets to charity while retaining an income stream for yourself or your beneficiaries during your lifetime or for a set number of years. When the trust term ends, the remaining assets go to one or more designated charities.
There are two primary types of CRTs:
Charitable Remainder Annuity Trusts (CRATs): These trusts pay a fixed annual amount based on the initial trust value.
Charitable Remainder Unitrusts (CRUTs): These pay a percentage of the trust’s annual revalued assets, which can vary depending on the investments' performance.
Benefits of a Charitable Remainder Trust
1. Tax Advantages:
CRTs can provide significant tax benefits, a major reason many choose this strategy. When you transfer assets to the trust, you may be eligible for a charitable income tax deduction based on the present value of the remainder that will eventually go to charity. Additionally, CRTs offer tax-free growth within the trust and can help reduce estate taxes if appropriately structured.
2. Income Stream for Life or a Set Period:
You or other designated beneficiaries receive a steady income stream, providing stability. This income may be particularly useful if you have highly appreciated assets, like stocks or real estate, that might trigger capital gains taxes if sold outright. By funding the CRT with these assets, the trust can sell them tax-free, allowing for potentially higher returns over time.
3. Legacy Giving and Supporting Your Values:
A CRT enables you to make a meaningful charitable contribution, supporting causes and organizations that reflect your values. This legacy can extend far beyond your lifetime, creating a positive impact for years.
How Does a CRT Work in Practice?
To set up a Charitable Remainder Trust, you will work with a qualified estate planning attorney to draft the trust documents and select the terms that best fit your goals. Here’s an outline of the typical process:
Asset Transfer: You transfer assets (cash, securities, or real estate) into the CRT.
Income Payments Begin: You (or another beneficiary) start receiving payments based on the annuity or unitrust format.
Tax Deduction: In the year the CRT is created, you may receive a charitable deduction based on the anticipated future philanthropic contribution.
Charitable Donation: When the trust term ends, the remaining assets go to your designated charity or charities.
Is a Charitable Remainder Trust Right for You?
While CRTs offer many benefits, they also require careful planning. Some factors to consider are:
Your Income Needs: A CRT may be ideal if you’re looking to supplement retirement income or support loved ones while reducing taxable estate assets.
Type of Assets: Appreciated assets work particularly well in CRTs, as they can be sold within the trust without triggering capital gains.
Charitable Intentions: If there’s a cause you feel strongly about, CRTs allow you to align your financial planning with your values and make a lasting difference.
Charitable Remainder Trusts provide a powerful tool to support your financial and charitable goals, allowing you to give back while enjoying potential tax savings and a stable income stream. If you’re interested in learning more about CRTs or other giving strategies, please give us a call or schedule a meeting, and we can help guide you through the process and help you make the best decision for your unique situation.
Creating a legacy doesn’t have to wait until you’re gone; with a CRT, you can start making an impact today while also planning for tomorrow.