When retirement finally arrives, hopefully you’ve met with a financial planner (if not, I know a good one I can refer you to 
) that has helped you map out your income plan through your golden years. If you have a philanthropic heart, then passing on a portion of your legacy to a charitable organization may be part of your plan. But how do you give to charity without jeopardizing your income needs in retirement? Let’s introduce you to the Charitable Remainder Trust (CRT). Setting up a trust seems complicated, but with the help with a knowledgeable attorney; setting up a trust can be relatively easy process. There are many types of trusts that you can set up, but we’ll focus on the CRT.
Trust Recap
If you’re not quite sure what a trust is or how it works, here’s a recap. Generally speaking, a trust is a legal entity that is central to a three-part agreement in which the owner of an asset, the trust grantor (This is you); transfers a legal title of that asset to a trust for the purpose of benefiting one or more beneficiaries. I should have warned that trust language can be kind of wordy, so please bear with me. The trust is then managed by one or more trustees. You can determine who the trustee might be. Either a loved one, close friend or relative, or even a financial institution. Trusts may be revocable or irrevocable, and may be included in any will to take affect of death. In summary, a trust will address these three items:
- How you want your assets managed, and eventually dispersed?
- Who you want to benefit now and in the future?
- Who you want responsible for carrying out these instructions?
How Does a Charitable Remainder Trust Work?
A charitable remainder trust is what’s also called a “irrevocable” trust, where once you place the assets in the trust they are in their good. Generally, you would want to place highly appreciated assets (for example stock) in the trust and then set it up where you receive an income stream from the trust. The income stream has the option to be set up where it pays you over your lifetime or a period certain- not to be greater than 20 years. In addition, you can also set it up to where it pays over the lifetime of your heirs. After the period or the life of the heir has passed, a charity will then receive any portion of the asses left over.
Benefits of a Charitable Remainder Trust
There are several benefits for implementing a CRT. By placing assets in the trust, you get an immediate tax deduction and since it’s treated as a gift, it can you help you avoid potential estate tax since now the assets are no longer part of your estate.
The other notable benefit is the ability to place assets with an extremely low cost basis in the trust and sell them without incurring any capital gains. Here’s an excerpt from FindLaw.com that elaborates more:
A charitable remainder trust is not subject to any income tax unless it has unrelated business income. Thus, if you are nearing retirement age and the funds contained in your existing retirement plan are inadequate for your future retirement needs, and if you hold any low basis assets outside your retirement plan funds, you have the opportunity of transferring those low basis assets to a charitable remainder trust and liquidating those assets to allow for a diversification of the proceeds into higher income yielding assets, without incurring any capital gains tax. As the grantor of the trust, you can retain an interest in the trust for your life in an annuity amount or unitrust amount as described above, to enhance the amounts distributed from your retirement plan. As assets are distributed from the charitable remainder trust, you would be taxed on those distributions in accordance with a tier system of income taxation.
CRT Example: Suppose you sell a real estate property for $1 million that you originally paid $50,000 for. Upon completion of the sale, you would owe capital gains taxes on the $950,000 difference. That tax could easily be greater than $175,000, depending on how long you owned the property and your overall tax situation.
Disadvantages of a CRT
The biggest and most obvious disadvantage of a CRT is that it’s a “irrevocable” trust and you no longer have access to the principle. You have to be sure that you plenty of access to other funds outside of the CRT that will take care of any immediate income needs.
Another disadvantage is the income tax deduction you get from the CRT. What makes it a disadvantage is that you you have a limitation in how much of a deduction you can take. The amount is based on several factors including your life expectancy, number o f heirs you select, and type of CRT you select.
Consult a Professional
If you think a CRT might make sense for your estate plan, be sure to consult with an attorney. The attorney should draft a personalized document to conform to the current laws of the appropriate jurisdiction.
