There are a number of important tax benefits to Charitable Remainder Trusts, or CRTs.
CRTs are trusts you set up to benefit one or more non-profits upon your death, but from which you pull out money during your life, often as a retirement plan. When you establish the trust, you can either have the yearly disbursements be for life, or for a specified number of years, up to twenty. If you pull out the same percentage of the initial value of the trust each year, this is called a Charitable Remainder Annuity Trust. If you pull out the same percentage of the current value of the trust each year, this is called a Charitable Remainder Unitrust. Since the value of the assets in your trust can go up or down from year to year, the disbursement from a Charitable Remainder Unitrust will vary, whereas the disbursement from a Charitable Remainder Annuity Trust remains constant.
By designating yourself as the CRT’s trustee, you manage the trust, determine the investments, etc. You also designate-and change if you choose-the non-profit or non-profits that will receive whatever remains in the trust upon your death.
But what’s appealing about CRTs for most people is that they are a form of charitable donation that carries with it four significant tax advantages:
1. Donating assets to a CRT makes you eligible for a tax deduction. How much of the value of the assets you’ll be able to deduct from your taxes is a function of your age and the percentage of the fund you’ll be pulling out each year. The less, actuarially speaking, you’ll likely pull out determines how much will be left for charity when you die, and the more that’s expected to be left for charity when you die, the bigger a tax deduction you’ll get.
2. Donated assets that have appreciated in value are exempt from capital gains tax. For example, if you have stock you bought for $100,000 that is now worth $300,000, and you put this stock in a CRT, neither you nor the eventual non-profit beneficiary will have to pay capital gains tax on that $200,000 increase in value.
3. Any increase in value of the assets after they’re already in the trust is also exempt from the capital gains tax. If that stock increases in value from $300,000 to $600,000 while it’s a part of the trust, that appreciation does not generate any capital gains tax liability.
4. CRT assets are excluded from the calculation of the value of your estate for estate tax purposes when you die.
For more on CRTs and other tax information, see www.irs.gov.