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CRAT, CRUT, CRT: the low down on charitable remainder trusts

The term charitable remainder trust is hardly self-explanatory, and some of the acronyms that go along with it, like CRAT and CRUT, don’t make things easier; but the concept behind the words does make the instrument one of my favorites in estate planning. As promised in my last post, I’ll talk about charitable remainder trusts (CRTs) in greater detail this week, answering questions such as: How does a CRT work? What are the different kinds? What are the tax advantages?

The bottom line on a charitable remainder trust is that it allows you to turn assets into an income for lifetime, all while you reap tax benefits and earn the sense of satisfaction that comes from doing good. With a CRT you as the grantor fund a trust by donating assets to a tax exempt charitable institution. The assets can be in the form of real estate, stocks, antiques, art work etc. Your designated trustee then sells those assets, invests the proceeds and pays you or the beneficiary you choose an income. After you die, or after a specified period of time, the charity receives what remains of the trust, hence the name of the tool. While CRTs are irrevocable, you do retain some flexibility including the right to name a new trustee or even to switch from one charity to another.

CRTs come with some nice tax advantages. First, you get an income tax deduction for the value of your original donation minus the estimated amount of income that you will be receiving from the trust. You can spread this deduction over five years. Second, because the assets you donated no longer belong to you they will not be subject to the estate tax after you die. Third, with your charity being tax exempt, the sale of your assets does not trigger the capital gains tax, no matter how much they may have appreciated since you originally acquired them.

As for how you receive your income — this is where CRAT and CRUT, the acronyms I mentioned earlier, come in. You can either opt for a fixed amount to be paid to you, independently of how your trust performs; in this case your trust is called a charitable remainder annuity trust (CRAT.) Or you can choose to receive a fixed percentage of the trust’s assets which makes your trust a charitable remainder unitrust (CRUT.) If your trust is well managed and appreciates fast, the latter is the obvious choice. Either way, IRS regulations stipulate that you will receive at least five but no more than 50 percent of the fair market value of your assets.

See why I like CRTs? If you’re not convinced yet, contact me! If you are, a final note: IRS regulations for charitable remainder trusts are complicated, and errors in setting up such a vehicle could cost you dearly. You will need an expert to advise you.

By Kevin J. Moore