The Charitable Remainder Trust

I haven't really emphasized the charitable remainder trust yet, but it is an income generating option. Part of the reason I haven't emphasized CRTs yet is because not many people want to do them. Your average person looking to use a trust for estate or financial planning purposes just doesn't have enough assets to leave a legacy to their children and a worthwhile gift to charity. (By worthwhile, I mean worth setting up and maintaining a trust to administer the gift specifically.) When choosing between the two, most people opt to leave a gift to their children or other heirs over charity, especially now that virtually all but the largest estates escape estate tax.

If you're wondering why I'm talking about legacies and estate tax so much, let me back up. Though I show my clients how they can use the charitable remainder trust to generate a stream of income, it is much more commonly employed in estate planning. Though there are many different types of CRTs, the basic one generates income from the asset you place into it - which it pays to you during your life - and then it distributes the asset to the charity of your choice on your death. The CRT is a way to give money to charity on your death, but remove it from your estate during your life thereby reducing estate taxes, and still get some income benefit from the gifted asset.

For income generating purposes, you can already see how the trust generates income, but there's a twist. Charitable remainder trusts are tax exempt, so highly appreciated assets can be sold through them without incurring any capital gains tax. This means that more of the proceeds of the sale can be reinvested to generate a larger income stream for you. (In contrast to the PAT, with the CRT, you need not have a fixed, contractual stream of payments. Payments are often a function of the amount of principal accruing in the trust, so if the value of the principal grows, so does your income.) Also, remember that you have gifted the asset to the trust, so when it makes payments to you, those are not payments for its purchase of the asset for which you must pay capital gains tax. You are just receiving income for which you will have to pay income tax. However, you do get an immediate income tax deduction for the gift of the asset to the CRT, so that will help offset your income tax burden. 

Despite the benefits of CRTs, I don't often recommend them to my clients. They are subject to a lot of scrutiny and regulation due to their tax exempt status. Mostly, though, the problem is the above-mentioned issue of having to choose between charity and heirs. Often, if the person setting up the trust is healthy enough, a life insurance policy will be purchased to replace the funds the heirs would have received. Policy premiums are just a financial drain on the eventual estate, and they can be quite large if you are purchasing the policy later in life. As well, you do lose control of your asset when you set up a CRT.

A CRT can work quite well for you if you're particularly charitable or have a large illiquid asset that your family will have a difficult time selling anyhow (for instance, through a CRT, the personal papers and writings of an author can be left to the university at which he taught, while the equally or maybe more valuable intellectual property rights to his published works can be left to his family). If you think this might be an option for you, feel free to call me at 760-917-0858 for a no-cost consultation.

Paula Straub
Save Gains Tax


This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are meant for informational use only. The information contained on this site does not constitute advice on tax or legal issues. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

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