Let’s say you are interested in providing a substantial contribution to charity, that you’d like to minimize the taxes you have to pay to the Internal Revenue Service (IRS), and oh by the way, you’d like to set up a steady income for yourself for your retirement.
One way for you to achieve all these goals is to establish a Charitable Remainder Trust, or CRT. With a CRT, you set aside some of your assets in a trust, while still being able to manage the trust, draw an income from it, and determine where those assets go when you die.
To create a CRT, you donate assets into a trust, naming yourself as the trustee, naming a beneficiary (usually also yourself, or yourself and your spouse) to receive income for your life or a designated number of years, and naming a beneficiary (one or more non-profits) to receive the trust assets upon your death. You must take out at least 5%, usually no more than 7%-10%, of the trust value each year as disbursements to your beneficiary (normally you), which can mean pulling money out for your retirement each year, but at least 10% of the value of the contributions to the trust must remain in the trust to be transferred to the designated non-profit beneficiary when you die. If you wish to defer your scheduled income from the trust in a given year you may, in which case it would accumulate toward a future year’s withdrawal.
The two main types of CRTs are the Charitable Remainder Annuity Trust and the Charitable Remainder Unitrust, which differ in how they determine the amount to be disbursed each year. With a Charitable Remainder Annuity Trust, it is the same amount each year, a percentage of the initial value of the trust. So if the trust’s initial value is $500,000, and the disbursal amount is set at 5%, this means you’d pull out $25,000 each year regardless of how the value of the assets in the trust might go up and down.
With a Charitable Remainder Unitrust, it is based on the current value of the trust. So if the trust’s initial value is $500,000, and the disbursal amount is set at 5%, in this case too that would mean your first year’s income taken from the trust would be $25,000. However if the trust were worth more the second year, you’d pull out more than $25,000, and if it were worth less, you’d pull out less than $25,000, because it’s always based on the current value rather than the initial value.
Strategically it’s good to donate assets to the trust that have increased in value that you haven’t paid capital gains tax on yet, because contributions to CRTs are exempt from the capital gains tax. If you own a security that you bought for $200,000 and it’s now worth $300,000, neither you nor the eventual non-profit beneficiary of the trust will have to pay capital gains tax on that $100,000 increase in value. Furthermore, if the assets increase in value after they’re already in the trust, those increases too are exempt from the capital gains tax.
Another tax advantage you’ll derive is that you may take a tax deduction each year you contribute to a CRT. The precise amount depends on an Internal Revenue Service (IRS) formula based on several factors, including what percentage you’ll be drawing out each year, and how many years you’ll be drawing it out.
The trust is irrevocable, however you remain in control of how the money in the trust is invested, and which non-profit will be the ultimate beneficiary. You can change the beneficiary, designate multiple non-profits to split the value of the assets, etc.
One final tax benefit is that money in a CRT does not count as estate assets when it comes time to calculate any estate tax that might be owed after you die.
Your accountant or tax professional can explain the CRT in more detail for you, and help you to set one up if you find this an appealing way to give more of your money to charity and less to the IRS.