A charitable remainder trust (CRT) allows you to donate money or assets to a charity while providing significant tax breaks for you and your heirs. However, before setting up a CRT, consider how they work. In this blog post, we will take a closer look at the pros and cons of a charitable remainder trust so that you can decide if this is the right option for you.
Creating Your Legacy: Benefiting Future Generations
You may be one of many who thought that an estate plan with a stretch IRA would provide for your family for generations. However, you may need to rethink your assets inheritance strategy with the SECURE Act in place since 2019.
If you intended to benefit your grandchildren with a stretch IRA that could give distributions over a lifetime while continuing to grow, the SECURE Act ended that possibility.
Instead, your heirs may only have 10 years to withdraw all distributions out of the inherited IRA after your death. The Act requires beneficiaries of some inherited IRAs to accept the allocations for the account’s entire balance within 10 years of the original owner’s death. In addition, they may owe income taxes on the distributions.
If you’re looking for a different vehicle to give generously to family members over their lifetimes and also benefit a charity or family foundation, the CRT may be your best bet.
What is a Charitable Remainder Trust (CRT)?
A CRT is an irrevocable trust that pays you (or your designated beneficiary) an income for life or a term of years. When the trust terminates, one or more charities or foundations receive the remainder of the distributions.
You can fund a CRT with cash or highly appreciated assets, such as stock or real estate. You receive an immediate tax deduction for a portion of the value of the assets transferred to the trust.
In addition, when you transfer appreciated assets into a CRT, you avoid paying capital gains taxes on the appreciation. For example, let’s say you have a stock you purchased years ago for $50,000, now worth $250,000. You will owe capital gains taxes on $200,000 of appreciation if you sell the stock. However, if you transfer the stock to a CRT, you avoid paying those taxes. Avoiding capital gains taxes is a significant benefit of a CRT.
Two Types of CRTs
- CRAT: A charitable remainder annuity trust pays you (or your designated beneficiary) a fixed dollar amount each year.
- CRUT: A charitable remainder unitrust pays you (or your designated beneficiary) an annual percentage of the trust’s assets, valued annually.
With both types of CRTs, the payments must be at least equal to the federal minimum distribution rules for retirement accounts.
The main difference between a CRAT and a CRUT is how the trustee calculates the distributions. With a CRAT, there are fixed payments. Payments fluctuate based on the trust’s assets with a CRUT.
CRTs can be structured to pay you (or your beneficiary) for life or for a set term of years (not to exceed 20 years). If you structure the trust to payout for life, it’s called a “life-income” CRT. If you structure the trust to pay out for a set term of years, it’s called a “term-of-years” CRT.
After the payout period, the remaining assets in the trust distribute to one or more charities of your choice.
Pros and Cons of a Charitable Remainder Trust
Now that we’ve covered the basics of CRTs, let’s take a look at some of the pros and cons:
- Immediate tax deduction for a portion of the value of the assets you transferred to the trust.
- Avoid paying capital gains taxes on the appreciation of assets transferred to the trust.
- Structure the trust to pay you (or your designated beneficiary) an income for life or a set term of years.
- At the end of the payout period, the remaining assets in the trust distribute to one or more charities of your choice.
- The trust is irrevocable, so you cannot make changes after you fund it.
- You must pay a portion of the value of the assets transferred to the trust as an upfront gift to charity.
- The payments you receive from the trust are taxable as income.
- There is a risk that the trust’s assets will not perform as well as expected, impacting the amount of income you receive from the trust.
As with any financial planning decision, carefully weigh the pros and cons before deciding if a CRT is right for you. Creating a CRT can be a complex process, so it’s essential to work with an experienced asset protection planning attorney to ensure the trust is properly structured and funded.
We Can Help
At Vail Gardner Law, we help you protect your assets from taxes, lawsuits, poor choices, and other threats. Our focus is on maintaining your legacy for future generations, whether your family or a foundation. We work with you to develop a comprehensive asset protection plan tailored to your unique circumstances and goals. Contact us today to schedule a consultation. We look forward to speaking with you.