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Charitable Remainder Trust |
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A charitable remainder trust (CRT) is a trust which you may create during your lifetime or when you die for your benefit or the benefit of others. The beneficiaries are entitled to receive a series of payments from the CRT over a period of up to twenty years or for the life or lives of one or more of the beneficiaries. At the expiration of the period for payments, one or more qualified charities of your choice will receive the property which remains in the trust. If you create a CRT during your lifetime, you may claim a charitable income tax deduction. When you die, your estate will receive a charitable estate tax deduction.
A CRT is based upon the concept that the ownership of property may be separated into a current time period during which the beneficiaries receive annual payments and the future ownership of the property by the charity. An actuarial calculation, based upon tables established by the IRS is used to determine the percentage of the fair market value of the property which you transfer to the CRT which represents the interest of the current beneficiaries who receive the payments, and the future ownership interest of the charity. If you create a CRT during your lifetime you will be entitled to receive a charitable income tax deduction based upon the value of the charity’s future interest. With careful planning, you may be able to use that deduction over a period of six years starting with the year in which the CRT was created.
You may have property which has appreciated substantially and will be subject to capital gains tax if you sell it. If you create a CRT and transfer the property to the CRT, the trustee can subsequently sell the property free of capital gains tax. This allows the trustee to reinvest the entire sales proceeds and generate annual payments to you or your designated beneficiaries which are substantially larger than they would have been if capital gains tax had been imposed on the sales proceeds.
When you die, the fair market value of the property in the trust at that time will be included in your gross estate for estate tax purposes. Your estate, however, will be entitled to a charitable deduction for the value of that property. Accordingly, property which you give to a CRT is effectively removed from your estate for estate tax purposes.
If you create a charitable remainder trust for the benefit of another individual during your lifetime, the current value of the stream of payments designated for that individual will be treated as a gift from you, subject to gift tax. If you have unused lifetime gift tax exemption, the gift will be charged against that exemption. You can create a CRT for your spouse without gift tax consequences.
You may be concerned that your gift of property to a CRT will unduly diminish the value of the estate which your family will inherit. If you have that concern, you should consider creating an Irrevocable Life Insurance Trust which will own one or more life insurance policies insuring your life. When you die, the life insurance trust will collect the death benefit, free of income and estate tax, and that money can be distributed to your family to replace the property which you contributed to the CRT.
This article is intended to acquaint the reader with some of the features and planning issues presented by CRTs, and is not intended to convey legal advice with respect to the reader’s specific circumstances. Specific planning opportunities which employ one or more CRTs require detailed legal analysis and drafting techniques and the reader is therefore encouraged to call one of the following attorneys who practice in the Trusts and Estates group at Quinlivan & Hughes, P.A. 320-251-1414.
Kevin A. Spellacy
John H. Wenker
Robert P. Cunningham
W. Benjamin Winger
Bradley W. Hanson
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