The Charitable Remainder Trust

THE COUNSELOR

Volume 3 • Issue 4 • May 2013

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business planning and charitable planning issues.  This is the first in a series of articles on charitable planning strategies.  In this month's issue, we will look at one of the more popular charitable planning strategies, the Charitable Remainder Trust.  If you are interested in learning more about the ideas discussed in this newsletter please contact us for a free initial consultation.


As individuals and families look to engage in philanthropy, one common tool is the charitable remainder trust or CRT.  A CRT can be used to:

  • Increase the income potential from a highly appreciated asset by delaying the impact of capital gains taxes on sale

  • Obtain an immediate income tax deduction

  • Reduce estate taxes as a result of the gift to charity

  • Benefit a charitable organization

How it Works

To obtain the benefits of a CRT you, as the “Donor,” transfer an asset (preferably an appreciated asset) into an appropriately designed irrevocable trust. This removes the asset from your estate, thereby reducing the size of your estate for estate tax purposes.  You receive an immediate charitable income tax deduction.  Because a CRT can be designed in several different ways, the amount of that deduction will vary.  The trustee of the CRT can then sell the appreciated asset at full market value, paying no capital gains tax on the sale.  This allows the entire sale proceeds, as opposed to just after-tax proceeds, to be re-invested into an income-producing asset.  You or another income beneficiary then receive an “income” for the term of the CRT with the remaining assets (referred to as the “remainder”) going to a remainder beneficiary at the conclusion of the term.

Who Can Be an Income Beneficiary?

In most CRTs, the Donor(s) are the income beneficiaries.  However, the Internal Revenue Code allows any “person” to be named as the CRT’s income beneficiary so long as at least one income beneficiary is not a charitable organization.  The term “person” includes: an individual, a trust or estate, a partnership, an association, a company, or a corporation.  The allowable term of the trust, whether lifetime or a term of years, will be affected by who the beneficiary or beneficiaries are.

Who Can Be a Remainder Beneficiary?

The remainder beneficiary of a CRT can be a public charity or a private foundation. The benefit can be split among multiple charitable remainder beneficiaries.  You can retain the power to change the charitable remainder beneficiaries or defer the decision until later. Your charitable goals should control how and when you name the charitable remainder beneficiaries.

Income Options – The CRT Variations

A CRT’s income distribution can be designed in several different ways depending on your objectives.  The following are variations of CRTs based on the income distributions:

  • Charitable Remainder Annuity Trust (CRAT)

  • Charitable Remainder Unitrust (CRUT)

  • Net Income CRUT with Make Up Provisions (NIMCRUT)

  • Flip-CRUT

Charitable Remainder Annuity Trust (CRAT)

In a CRAT, a fixed sum of not less than five percent (5.0%) of the initial net fair market value is paid to the income beneficiaries at least annually.  The annuity amount cannot be changed regardless of fluctuations in portfolio value and additional contributions to the CRAT are prohibited.

Charitable Remainder Unitrust (CRUT)

In a CRUT, a fixed percentage of not less than five percent (5.0%) of the net fair market value of its assets, valued annually, must be distributed to the income beneficiaries.  Additional contributions to a CRUT are permitted.

Net Income CRUT with Makeup Provisions (NIMCRUT)

In a NIMCRUT, the income beneficiary receives income from the trust up to an annual fixed percentage equal to at least five percent (5.0%) of the yearly net market value of the trust assets.  If “trust income” is not sufficient to pay out the full fixed percentage in any given year, the trust may make up this deficiency in future years when the trust income is higher.

Flip-CRUTA

Flip-CRUT is a CRUT that allows you to switch or flip from having a net income option to a standard income provision.  Initially, a Flip-CRUT functions like NIMCRUT and only distributes the trust’s accounting income to the income beneficiaries. Upon the occurrence of a permissible triggering event, the trust “flips” to a standard CRUT payout.  Permissible triggering events could include: the sale of an unmarketable asset, a date certain, the birth or death of any person, the marriage or divorce of any person, or an event outside the control of the trustee or any other person.

Who can be the Trustee?

The Trustee of the CRT can be any individual, including you as the Donor.  The Trustee could also be an institution such as a bank or charity.  If you choose to act as Trustee you must take steps to ensure that the trust is administered properly.  Outsourcing these duties is a possibility.  Failure to properly administer the CRT could result in the loss of tax advantages and/or penalties.

Conclusion

The CRT can be a powerful tool that can be utilized to meet both tax planning and charitable goals.  The CRT allows you to meet these goals, while still retaining a measure of control over the asset during your lifetime. You should consider a CRT if you are contemplating a transaction that will generate a significant tax liability, if you wish to set up a present or future income stream, or if you have charitable goals.


This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.