Everyone wants to leave some kind of legacy when they pass on. We may not have museums, libraries or sports stadiums named after us, but we can still bestow something of value that reminds posterity that we contributed to our society.
Legacies often take the form of financial donations to cultural institutions or humanitarian causes. One attractive vehicle toward this end is the charitable remainder trust (CRT), according to the IRS. Tax-exempt and irrevocable, the CRT is a way for benefactors to minimize taxable income and generate money while reserving monies for the charity of their choice. But this isn't without its drawbacks.
What Is a Charitable Remainder Trust?
When a trustor, also known as a grantor or benefactor, is using a "split-interest" financial means of managing and distributing assets when they set up a charitable remainder trust. One portion of the trust assets goes to investment vehicles for the purpose of creating further revenue. The rest, or the remainder, is directed toward one or multiple charitable endowments.
The trustor can put cash, securities, real estate or other assets into the trust. The Internal Revenue Service offers a partial deduction to the grantor who sets one up, contingent on the type of CRT. A trustor can make donations once, twice, four times or 12 times each year.
The benefactor surrenders the rights of ownership of the assets in question when the donations into the trust are made. In so doing, these valuables are shielded from the probate process at the death of the trustor. They're exempt from being included in the value of the estate for estate tax purposes (per the IRS).The investment or non-charitable beneficiaries of the CRT can receive donations for 20 years maximum, or until the death of the grantor, whichever comes first. All trust income is received by the selected charitable beneficiaries at this point.
Are All CRTs the Same?
CRTs exist in two major categories. The first is the charitable remainder annuity trust (CRAT). This arrangement provides for a specified amount to be paid from an insurance contract to each of the non-charitable beneficiaries. That specific quantity must be no less than five percent of the total assets in the trust, and no more than 50 percent. Nothing over and above that designated sum is permitted to be added.
The other classification is that of charitable remainder unitrust (CRUT). Like the CRAT, the CRUT sets boundaries on assets distributed to beneficiaries: a five percent floor and 50 percent ceiling. But the CRUT disbursements aren't based on a dollar amount as with the CRAT. They're a percentage of the total assets. Thus the annual total distribution is subject to change year over year. Another distinction is that CRUTs allow for supplementary contributions.
Are There Reasons to Avoid CRATs and CRUTs?
The simultaneous investment in income assets and donation to charitable efforts is one attraction of these types of trusts. The overall reduction in estate, capital gains and gift taxes is a further incentive. Still, CRTs reflect the disadvantages of charitable trusts. Setting them up entails all kinds of legal fees and expenses. Moreover, these are by definition irrevocable so the trustor surrenders all control once the trust is formed.
These disadvantages must be considered against the obvious tax benefits. A thorough consultation with a tax attorney and financial advisor should precede jumping into the formation of a CRT. It's also important to note that states treat trusts in different ways. Expert advice is therefore a must.