Is a Charitable Remainder Trust a Good Planning Strategy?

Planning is easier when you have a clear view.

The most common answer to questions posed in law school is...it depends. Whether a CRT is right for you depends on your goals, the type of asset being contributed and several other factors.

If you are a high-net worth individual and considering selling real estate or a business, you may have a trusted advisor recommending a charitable trust. Often this will mean a Charitable Remainder Trust (CRT). A Charitable Remainder Trust can be a good planning strategy for some, but it's important to understand the basics, the benefits and potential downsides.

First, a CRT is for someone that has a charitable purpose. It's a way for you to gift property to a trust, receive an income stream from that asset, and eventually leave any remainder in the trust to a charity of your choice.

This works quite well if you have charitable goals you would like to achieve, such as leaving money to a church at the end of your life. However, sometimes advisors recommend the CRT to persons that don't belong to a church and don't have charitable goals. If that's you, a different type of trust may be better suited to your needs.

Assuming that you do in fact have charitable goals, the CRT typically works like this:

1. You gift your asset to the CRT. If the asset is an appreciated asset (like stocks or real estate), the CRT can sell those assets without incurring capital gains taxes, allowing for more to be invested and potentially generating higher income for the beneficiaries. Please note: the timing of the gift is important if appreciated asset is contributed to a CRT. If the sale of the asset is "too certain" the IRS may deny the deferral of capital gain taxes. Always consult an attorney on that matter.

   
   

2. You (or other beneficiaries that you might choose such as a spouse or children) will receive an income stream from the CRT for the rest of your life (or a term of years if you choose).

   
   

3. You typically get a charitable income tax deduction the year that you fund the trust.

   
   

4. You remove assets from your taxable estate.

In short, the CRT works well for someone that wants an income stream for a property they might intend to otherwise sell and wishes to leave a remainder amount to a charity of their choice.

The downside of the CRT could be that you will be "stuck" with the income stream. It generally cannot be changed once you have completed the CRT. This means that once the CRT is established, you generally cannot alter the non-charitable beneficiaries receiving the income stream, or the payout rate. When compared with keeping the asset yourself (or sale proceeds therefrom) this is much more rigid, and therefore you give up significant control of the asset and will generally be limited to the set income stream. For example, if you contribute an asset worth $5 Million into the CRT, and later wished to extract $1 Million from the CRT on top of your normal payout...this would generally not be possible.

The details are always very significant with CRT planning, and you should consult an attorney you trust when creating a CRT to learn about the pros, cons and legality of the CRT as well as other possible ideas that might accomplish your planning goals better than a CRT.

This is not legal advice and does not form an attorney-client relationship. This article is provided for informational purposes only. If you would like legal advice about the topic of this article please contact Swiderski Law to speak to an attorney.