CHARITABLE REMAINDER TRUST (CRT)
If you have highly appreciated assets (such as stocks or real estate) that you would like to turn into income-producing investments—without incurring capital-gains tax on the sale of the assets—you may be able do it with a charitable remainder trust.
To take advantage of this planning opportunity, you can put the appreciated assets into a trust, naming one or more qualified charities as the final beneficiary. Then the trustee sells the assets at full market value and reinvests the proceeds in income-producing investments, held by the trust. Capital gains on the sale of investments within the trust are free of income tax. The trust makes annual payments to you as the grantor, either for life or for a specified number of years. Thereafter, the disposition of the trust depends on your choice among various permitted trust designs.
If you are married, the trust may continue to make annual distributions to the surviving spouse for life. After the death of the grantor and spouse, it is even permissible to have the trust continue to make annual distributions to a subsequent beneficiary, such as your child, for life. When all "non-charitable" beneficiaries are deceased, the principal of the trust (known as the "remainder") is paid to the charitable beneficiary.
A charitable remainder trust can be an effective means to provide lifetime income from an appreciated asset that would not otherwise produce a competitive level of current income. The use of a charitable remainder trust involves the charitable gift of a current asset. That means you are giving up access to the principal of the trust fund. Also, it causes a reduction of estate assets available to your heirs. For this reason, the charitable remainder trust is often coordinated with an irrevocable life insurance trust, designed as a replacement for your heirs of the assets used to fund the trust. Because the "replacement" life insurance is held in an irrevocable trust, the policy proceeds are free of federal estate tax.
A charitable remainder trust offers two additional advantages:
- The calculated remainder value represents a charitable contribution, at the time the trust is established, that can qualify as an itemized deduction from your current federal taxable income.
- The gift to the trust also represents a charitable deduction for your estate, reducing the estate tax.
The deduction permitted for charitable contributions in a given year is limited. Generally, your deduction may be limited to 30% of your adjusted gross income. Any excess contributions can be carried over for the next five years, or until the deduction is used up.
Any deduction not used within five years will be lost. But if handled prudently, a charitable remainder trust can help you benefit both yourself and a worthy cause.
