A charitable remainder trust (CRT) is a tax-exempt irrevocable trust that enables the grantor, or asset owner, to distribute trust income to beneficiaries and charities. It is a “split interest” vehicle. Depending on the type of trust, income from a CRT can either be distributed as a fixed annuity or a fixed percentage of the trust balance at that time. The main advantage of charitable remainder trusts is tax savings. Income derived from CRTs is eligible for tax exemption. Trust grantors can also save on estate taxes and capital gains taxes by placing their assets inside a CRT. The disadvantage of putting assets into a CRT is that they cannot be removed from the trust, even during an emergency. Before opting for a charity remainder trust, you must think carefully think through its pros, cons, and idiosyncrasies. Charitable remainder trusts help grantors achieve three goals within a single investment vehicle. After the CRT term is over, the remainder of the assets are automatically turned over to the charity of their choice. For the reasons outlined above, charitable remainder trusts can be an ideal vehicle for retired individuals. They can turn over their assets to a trust and enjoy tax benefits on their annual income, while donating to a charity of their choice. There are two main types of charitable remainder trusts. Consider the case of two individuals, Julie and Jim, who have each setup trusts with a value of $10 million. Both trusts grow at an annual rate of 10 percent. Jim has opted for CRUT income distributions while Julie wants CRAT-style fixed amounts each year. At the end of the first year, their income distributions are $100,000 i.e., they are the same amount. Subsequent distributions for both will be different. While Julie will continue getting the same amount from her trust, Jim’s distributions will be a function of the balance remaining in his trust. So, he will get 10 percent of the remaining $990,000 at the end of the second year and so on. Payouts to beneficiaries and charities change based on trust earnings. Thus, if the trust earns more in a year and has fewer beneficiaries, then a charity might get more of the original trust value. In the example above, if there were more beneficiaries and the trust failed to earn at the given growth rate, then the charitable beneficiary would earn less. There are multiple variations of trusts, such as STAN-CRUT (standard CRUT) and NI-CRAT (Net income CRAT), within the CRUT and CRAT universe. Therefore, it is always a good idea to consult with an investment professional before actually making a commitment to any investment vehicle. The advantages of a charitable remainder trust are as follows: The disadvantages of a charitable remainder trust are as follows: While the idea of a trust that provides for income and donates to charities may sound attractive, there are caveats attached to it. For starters, income generated from a CRT depends on the beneficiary’s age. The present value in remainder interest generally decreases with increasing age, leaving little for beneficiary payouts. Therefore, if an individual establishes a charitable remainder trust at an advanced age, then there might be a possibility that they might not get as high a percentage of the trust value as payouts than if they had established the trust earlier. Adjusting payout amounts for inflation is not allowed in CRTs and could result in tax deductions. There are also restrictions on the types of assets that can be placed in a CRT. For example, mortgaged property cannot be included in a trust nor can S-Corp businesses. You must also designate 10% of your trust income for charity. In the past, when there were no set income designations for charities, CRT beneficiaries could get as much as 90% of a trust’s value as income. Now that figure is much lower. The transfer of assets, which results in significant tax advantages, must also be planned out in advance. Assets must be conveyed to a trust before they are appraised or sold. Otherwise, they might be discounted in their valuation for a number of factors including lack of marketability or minority interest. For example, if you intend to include property into a trust, it is always a good idea to discuss deal-making after it has been transferred into a trust rather than making a deal for sale before it is included. Most of the steps for the process to create a charitable remainder trust remains the same as for other trusts. This means that you must make an inventory of assets to decide which ones to include in the trust, identify beneficiaries and trustees, and transfer the title deeds of your assets to the trust. There are two important additional steps that you need to take while designing a charitable remainder trust.How Do Charitable Remainder Trusts Help in Estate Planning?
What Are the Advantages and Disadvantages of a Charitable Remainder Trust?
Things to Consider for CRTs
How to Create a Charitable Remainder Trust
Charitable Remainder Trust (CRT) FAQs
What does the acronym CRT stand for in finance?
CRT stands for Charitable Remainder Trust.
What is a CRT?
A charitable remainder trust (CRT) is a tax-exempt irrevocable trust that enables the grantor, or asset owner, to distribute trust income to beneficiaries and charities.
How does a CRT benefit estate planning?
Charitable remainder trusts help grantors achieve three goals within a single investment vehicle. First, they provide a regular stream of income to the trustors or grantors from their asset portfolio. Second, they provide income tax deductions to grantors based on the amount or percentage of trust value set aside for charity. Third, a charitable remainder trust enables trustors to target their charity goals by making payouts to their favored causes or charities.
What is the disadvantage of a CRT?
The disadvantage of putting assets into a CRT is that they cannot be removed from the trust, even during an emergency.
Are there restrictions on the type of assets that can be placed in CRT?
Mortgaged property cannot be included in a trust nor can S-Corp businesses. You must also designate 10% of your trust income for charity.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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