Charitable Remainder Trust: Helping Charity While Helping Yourself

2 MIN READ | #blog

You’re at a point in your life where you would like an additional source of income. You have assets and due to your investment savvy, these assets have grown significantly. 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. However, given economic uncertainty, you’re not sure you can afford to simply give away these assets to charity. That’s where a Charitable Remainder Trust (CRT) comes in.

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 charitable and non-charitable beneficiaries. It serves dual 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”).

When the gift is made into the trust, you’re eligible for a current charitable income tax deduction based upon the present value of the remainder interest which will ultimately pass to the charity. Income earned by the trust 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 with no current capital gains tax liability at sale. The sale’s proceeds are then utilized to purchase an investment that will provide income to fulfill the income interest. You’ve now used a highly appreciated asset to satisfy your income needs and your charitable intent with no adverse tax consequences.

What are the Advantages?

Here are some of the advantages to creating a CRT:

  • It enables you to make a significant charitable contribution 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.
  • Using highly appreciated assets to fund the CRT results in current capital gains tax avoidance when the assets are sold by the trust.
  • You reduce your estate for estate tax purposes by giving away assets to charity.

If you’re concerned that you’re reducing the legacy that you may be leaving your children or other heirs because of the remainder interest going to charity, you may wish to implement the CRT in tandem with another estate planning technique known as the Wealth Replacement Trust. The Wealth Replacement Trust purchases 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 going to charity.

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