For some, planned giving can be an important component of their estate plan. Planned giving is the practice of making a substantial charitable gift part of a donor’s estate plan, which can either be distributed during the donor’s lifetime or after their death. Often times, smart planned giving involves combining a few different vehicles, such as a donor advised fund, and a charitable remainder trust (CRT). While we’ve explained a donor advised fund in a previous blog, linked above, another very popular option for smart charitable giving is the charitable remainder trust.
Not to be Confused with a Charitable Lead Trust
A charitable remainder trust is the inverse of its sibling, the charitable lead trust (CLT). Both are known as “split interest” trusts, which refers to the “split” of how they’re broken down into two components. The first is a life interest component, and the second is a remainder interest component. A notable difference between the two is how they pay income. A CLT first pays income to a charitable beneficiary for a specified amount of time, then pays the remaining assets (or remainder interest) to a non-charitable beneficiary. Conversely, a CRT first pays a stream of income to non-charitable beneficiaries for a period of time, and then the remainder is paid to a charity.
There are also some substantial tax differences. With a CRT, the grantor can claim a tax deduction on his contribution, whereas the grantor of a CLT does not receive any deductions to their income. The grantor of a CLT may also have to pay a federal gift tax on a portion of each contribution, though it’s only on the amount or remainder interest set aside for non-charitable beneficiaries.
So why use a CLT? One example would be for donors who are interested in charitable giving, but have heirs that are minors or may not be ready to assume the financial responsibility of managing the assets.
Benefits of a Charitable Remainder Trust
As mentioned before, a CRT is a tax-exempt entity. Because of this, they can be extremely useful for donors who want to sell appreciated assets or to create income streams for beneficiaries. Through a Charitable Remainder Trust, donors may also able to receive a charitable income tax deduction, gift and estate tax savings, and potential growth of income over time and enjoy investment diversification.
CRTs are classified according to their payment methods. Charitable remainder annuity trust pay a fixed dollar amount at least annually. Charitable remainder unitrusts on the other hand, pay a fixed percentage of the fair market value of the trust’s assets. Both types of CRTs must pay no less than 5% of its fair market value annually, but no more than 50% according to the IRS.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Tax rules governing trusts are complex. You should seek the advice of a qualified tax and trust professional before determining which strategy is better for your situation.
At Walsh & Associates, we will gladly work with you to determine the right charitable giving vehicles to fit your needs. Please do not hesitate to contact us or call, 941-952-1188.
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