You’re at a point in your life where you would like an additional source of income. You have assets that have grown significantly — such as publicly traded securities and real estate — so selling them would result in large capital gains. At the same time, you’re charitably inclined. You know that giving away highly appreciated assets to charity is one of the best income tax strategies for philanthropists, but, because of economic uncertainty, you’re not sure you can afford to simply give away these assets to charity. That’s why you should consider a Charitable Remainder Trust (CRT).

What’s a Charitable Remainder Trust?

A CRT is an irrevocable trust with significant income tax advantages. It’s commonly known as a “split-interest trust” because it has both charitable and non-charitable beneficiaries. It serves two purposes: 1. to provide you with a stream of income (the “income interest”) for a certain term of years or for your lifetime, and 2. to have the balance of that asset eventually go to your favorite charity (the “remainder interest”).

How does a Charitable Remainder Trust work?

• When you make a gift into the trust, you’re eligible for a current charitable income tax deduction. (The deduction is based upon the present value of the assets that will eventually go to the named charity.)
• Income that the trust earns isn’t currently taxable. Instead, the income tax recognition may be spread out over the number of years in which trust assets are distributed.
• The trustee can sell the transferred assets at full market value, with no current capital gains tax liability at sale.
• The sale’s proceeds are then used to purchase an investment that will provide you with a stream of income.

You’ve now used a highly appreciated asset to satisfy your income needs and your charitable intent without any adverse tax consequences.

What are the advantages?

Here are some reasons to create a CRT:

• You can make a significant contribution to charities of your choosing without sacrificing your income needs.
• It provides a charitable income tax deduction for the present value of the remainder interest of the CRT assets going to charity.
• By using highly appreciated assets to fund the trust, you can avoid capital gains tax when the trust sells the assets.
• You reduce your estate for estate tax purposes by giving away assets to charity.

If you’re concerned that you’re reducing what you may be leaving your children or other heirs because of the remainder interest going to charity, you may wish to establish the CRT in conjunction with another estate planning technique that’s known as a wealth replacement trust. A wealth replacement trust buys life insurance using a portion of the income stream that you receive from the CRT. At your death, the life insurance proceeds will “replace” the value of the assets that are going to charity.

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2022-144648 Exp. 10/24