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Charitable Remainder Trusts

A Tax Efficient Way for Donors to Give & Receive

charitable trusts

By Lisa R. Schneider AAMS, AIF

A charitable remainder trust (CRT) can be a great way for donors to plan for both charitable giving and tax efficient benefits to themselves, their spouses, or others. Tax savings are generated because donors receive income, gift, and estate tax deductions for the value of their charitable donations and can defer or avoid capital gains tax when appreciated assets are donated.

What is a CRT?

A CRT is an irrevocable trust that enables donors to give money or property to charities while continuing to receive income from the property for life or for a period of time. The donor (called grantor) and/or other beneficiaries receive distributions from the trust annually and the charity receives the remaining assets when the trust ends. The grantor gets an immediate income tax deduction for the remainder interest (subject to some limitations), defers or avoids capital gains tax on the donated assets, and gets gift or estate tax deductions for the remainder interest. CRT transfers are irrevocable, and terms of the trust are unchangeable, though assets and charitable beneficiaries may change.

How does a CRT work?

CRT’s can be created in two ways, either as Inter Vivos, created and funded during the grantor’s life – which provides income to the grantor and/or the grantor’s spouse or other family member – or as a Testamentary CRT, funded at the grantor’s death through a will or living trust and used to provide benefits to heirs and reduce the grantor’s taxable estate.

Generally, there are two forms of CRT’s: Charitable Remainder Annuity Trusts (CRAT) and Charitable Remainder Unitrusts (CRUT).

With a CRAT, the annual distributions to the income beneficiaries are a percentage (not less than 5% or more than 50%) of the initial net fair market of the assets used to fund the trust. The payout is fixed. If trust earnings are insufficient to meet the required amount, principal must be used. Changes in asset value over time accrue to the benefit or detriment of the remainder charitable beneficiary. This annual payout certainty makes the CRAT more attractive for older grantors. Additional contributions to a CRAT are not permitted.

A CRUT has a variable annual payout, a percentage (not less than 5% or more than 50%) of the current fair market of the assets in the trust. Assets are revalued each year. If principal increases, the payout increases. A CRUT is the preferred form for younger grantors who can risk reductions in payouts in return for the potential to hedge against inflation. Contributions to a CRUT can continue.

While there are variations on standard CRUTs and many variations in individual and family estate and tax planning needs, Charitable Remainder Trusts are an exceptional tool for donors who wish to give generously after their lifetimes, receive income during their lifetimes, realize immediate income tax deductions, reduce or eliminate capital gains, gift, and estate taxes, and enjoy freedom from investment management decisions and duties.

Lisa R. Schneider is a Financial Advisor at Raymond James & Associates and can be reached at:

[email protected]

Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.

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