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Charitable Remainder Trusts

 

Charitable Remainder TrustsMany people would like to be more gracious in their giving, but they are understandably reluctant to give away assets today, that they may need to maintain their financial independence tomorrow. Fortunately, the Internal Revenue Code recognizes that it may be attractive for such taxpayers to have their cake and eat it too, through the use of Charitable Remainder Trusts (CRTs).

Charitable giving has always been a tool that estate planning attorneys use to reduce the size of their clients’ estates for estate tax purposes. There are many types of Trusts that can accomplish this type of tax reduction. Charitable Remainder Trusts are often utilized to capitalize on the favorable treatment the IRS gives to charitable giving. Through a Charitable Remainder Trust, you may increase your current income, and enjoy income tax deductions, while retaining the ability to change the ultimate charitable beneficiary right up to the time of your death.

Here is how it works: First, you contribute an asset to the CRT. It is important to note that appreciated assets (like real property) are commonly contributed because they tend to be low income producers, and if sold by you there will be a capital gains tax owed. Second, the Trust sells the assets without capital gains taxation and then reinvests the proceeds in an income-producing portfolio that grows income tax free inside the CRT. Third, you and your spouse receive a lifetime income stream from the Trust, as well as a valuable income tax deduction for up to six years. Fourth, if the ultimate charitable beneficiary changes for the worse during your lifetime, then you may replace them with another charity by reference in your Last Will and Testament. At your death the charity owns the funds inside the Trust and your estate does not, potentially preserving assets and benefiting a charity at the same time.

Under the Charitable Remainder Trust umbrella there are different types of CRTs. The two main types of Charitable Remainder Trusts utilized are Charitable Remainder Annuity Trusts or CRATs, and Charitable Remainder Unitrusts or CRUTs. The basic difference between a CRAT and a CRUT is the character of the income payments that flow to the recipients. A CRAT will pay a fixed amount, which can be either expressed in dollars or as a percentage of the value of the initial funding amount. A CRUT, on the other hand, will have a variable payment that is expressed as a percentage of the Trust assets that are determined annually. Basically stated, the payment from a CRAT is a fixed amount, and the payment from a CRUT is variable.

There are different investment options available to CRUTs and CRATs. CRATs typically invest in assets that produce a fixed income, like annuities. CRUTs on the other hand have the flexibility to invest for growth, like stocks and mutual funds. Generally, the most important factor in determining which of these vehicles is selected is the age of the income recipients. Older Grantor recipients tend to favor the safety and security of the CRAT, whereas younger Grantor recipients favor the potential for growth associated with more risky investing. If you are charitable minded, and have a need to reduce the size of your estate, while still enjoying the benefits of that particular asset during your lifetime, a Charitable Remainder Trust may be for you.

 

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