A Charitable Remainder Trust
Simply speaking, a CHARITABLE REMAINDER TRUST (CRT) is a trust established to provide income to one or more persons for a term of years (which could be for life), with the remainder to a charity. The CRT distribution of income can be structured either as an annuity (CRAT) or as what is known as a unitrust (CRUT).
A CRAT pays out a fixed dollar amount for the defined term. Thus, any increase or decrease in the value of the original donation affects only the remainder going to charity. A CRUT pays out a fixed percentage of the value of the trust annually. Thus, any increase or decrease in the value of the original donation will affect both the annual distribution and the remainder going to charity.
There is an immediate charitable deduction upon the creation of the CRT, based on the actuarial value of the remainder interest. The terms of the trust determine the parameters used in the actuarial valuation. Generally speaking, he higher the annual payout and the longer the term of the trust, the lower the value of the charitable donation. The calculation of the charitable deduction varies from time to time because the factors (interest rates and mortality tables) vary. Only an Actuary can determine the value. Generally, as an example only, a CRUT providing for a 3% annual payout for a trust expecting to last 20 years will generate a deduction equal to 60% of the value of the property placed into trust.
The annual income from the CRT is taxable to the recipient based upon complicated formulae. The determination is based on how much of the income of the trust was from capital gains, how much from ordinary income, and how much from return of capital. Care must be taken in the selection of the trustee, who will be responsible for advising the recipient of the taxable income.
It is not necessary that any specific charity be named as the ultimate beneficiary or that it all go to one charity. It is only necessary that the remainder must go to an organization for which donations are deductible under Section 170(c) of the Internal Revenue Code. Frequently, a Donor Advised Fund is used as the charitable beneficiary, thus allowing the donor or his or her progeny to benefit after the term of the CRT by being able to direct periodic gifts from the remainder to specific charities of their choice.
A CRT must follow very strict guidelines established by the IRS. Care must be taken in the drafting. Details must be discussed with your legal advisor.
A CRT, once established, can be an effective asset protection device, for, although the trust provides income to the donor, the body of the trust is exempt from the donor’s creditors. Most brokerages or mutual fund managers are willing to accept the duties of trustee and will provide the actuarial determination of the value of the charitable donation and file all necessary tax returns.