Careful estate planning can accomplish important financial and personal objectives. A well-crafted plan should allow one to continue to receive income and have access to assets during life, avoid the need for any probate administration in the event of death, and minimize the impact of income, gift and estate taxes. In addition, a careful plan should allow one to accomplish any charitable-giving goals. Utilizing a Charitable Remainder Trust (CRT) as part of one’s estate plan can accomplish these goals.
A CRT is created when a person transfers assets into a properly-qualified trust during his or her life or at death. The “person” can be any individual, corporation, partnership, limited-liability company or trust. Creating a properly-qualified CRT will generally require the assistance of counsel; but, once created, donors receive tax benefits, including:
(a) An income tax deduction for a portion of the value of the assets transferred into trust, and the tax deduction can be carried forward for future years if not all used in the current year,
(b) Avoidance of tax on the capital gain of appreciated assets transferred into trust, and
(c) On death of the donor, elimination of any estate tax on the entire value of the assets transferred into trust.
Along with these tax benefits, the CRT trust agreement will provide for payments to be made to designated income beneficiaries for the rest of their lives or for a designated term of years, providing a guaranteed income stream. In most cases, these beneficiaries are the donor and his or her spouse. Other individuals or entities can be designated as income beneficiaries with varying tax consequences.
There are two types of CRT’s, a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT). Each format determines the way income is paid. In a CRAT, the income paid resembles a traditional annuity and is a fixed amount each year. Regardless of the CRAT’s value, payments to income beneficiaries are unchanged. Conversely, with a CRUT, the income paid is a fixed percentage of the CRUT’s value. Each year, the CRUT is revalued, and the payments to income beneficiaries fluctuate with the valuation.
Once the income beneficiaries have passed away, the remaining assets in the trust are transferred to the charity designated as the remainder beneficiary. The assets avoid the need for any probate administration because they are held by the trustee of the trust and are not in the donor’s probate estate. Donors may designate more than one charity as a remainder beneficiary. And, although a CRT is irrevocable, donors can retain the right to change the charitable beneficiary in case their philanthropic desires change.
Estate planning requires careful consideration and the advice of knowledgeable professionals, such as an attorney. Appropriately-tailored CRTs can help insure an estate plan suits a person’s asset-management objectives and goals. For individuals desiring assured income, favorable tax results, and charitable giving, speaking to an advisor about a CRT is well worth the time.