One of the most popular vehicles for giving to charities, as well as an efficient estate planning tool, is the Charitable Remainder Trust, better known as a CRT. There are four main advantages to creating a CRT. One is the ability to put highly appreciated assets or property into the trust and subsequently sell all or part of the assets while avoiding a capital gains tax. The second is the donor (grantor) can receive income from the trust while still living. In many cases, the beneficiaries of the grantor can also receive income for a specified period of time, at which point the remaining value of the trust, the principal, is given to the charity that was previously chosen. The third advantage is the grantor is entitled to a current income tax deduction for the fair market value of the donated assets. Fourth, the donated assets are no longer included in the estate for estate tax purposes at the death of the donor.
Assets that are commonly transferred to a CRT are cash, securities (stocks, bonds, mutual funds, etc.), real estate, a business, or a combination of them. The maximum amount of income that the donor and/or beneficiaries can receive is based on the value of the gift and the ages of those who will receive the income. The amount that you would be able to use as a charitable deduction is based on the amount of the gift, the cost basis and your income tax bracket. The donor may have control over how the assets are invested within the trust, may choose more than one charity, and may switch from one charity to another.
The CRT is a great estate planning tool because it reduces the value of the estate for estate tax purposes to your children and/or grandchildren. The CRT can be paired with an Irrevocable Life Insurance Trust (ILIT) funded with a life insurance policy for the same value as the asset that was donated to the charities in the CRT. This plan, if done properly, makes the proceeds from the life insurance income tax-free and estate tax-free to the beneficiaries. This is a strategy known as wealth replacement, meaning replacing a taxable asset with a tax-free asset to your children at your death.
The downsides to this type of estate planning are that the donation of an asset to the trust is an irrevocable decision; the donor or beneficiaries receive an annuity payment from the trust leaving very little flexibility to the income stream; and spendthrift provisions in the CRT may prevent the sale of the income interest (if the donor wishes to get their hands on a lump sum of money from the CRT by selling the remaining value of the income stream to a company that buys them).
There are no gift tax concerns with this type of hybrid plan. However, as you may have already guessed, this type of philanthropic giving with the associated tax benefits can be powerful but complex. Charitable remainder trusts are a specialty and you should only consider working with estate planning attorneys, tax advisors, and financial advisors who are very experienced at putting together the type of plan that would be best for you. Your family situation, current income needs, income tax bracket, estimated estate tax liability, and financial consequences are just a few of the important factors in determining whether this irrevocable estate planning strategy is beneficial in meeting the current and future needs of your family. Experts that have mastered this complicated area are the best people to advise you on how to design your personalized Charitable giving plan.
Watch for Part II of this article where I discuss the difference between a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT).
Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Management Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor
and Ten Easy Tests for Finding the Best One
. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit www.daviswealth.com, or email: email@example.com.
Davis Wealth Management Group, an independent firm with securities offered through Summit Brokerage Services, Inc. Member FINRA & SIPC, and advisory services offered through Summit Financial Group, Inc., a registered investment advisor.