Paul Tarins, RICP®,WMCP®,CSRIC™
Estate planning is about protecting the people you love after you’ve gone, and leaving a legacy so that you can continue to provide benefits for charities or causes you care about. There’s an estate planning tool that can accomplish both objectives—and also provides some tax and portfolio diversification advantages.
We’ll discuss what a charitable remainder trust (CRT) is, how it performs as an income generation tool and how it becomes a lasting legacy. We’ll also explain the two different types of CRT that investors can choose from.
Charitable Remainder Trusts – What Are They?
A CRT is a tax-exempt trust divided into two entities for the purposes of donating to the charity of your choice, while provisioning for a noncharitable beneficiary, such as the creator of the trust or any named individual or group.
The main ideas behind establishing a CRT include:
- Capital Gains & Estate Tax Advantages
A CRT lets you avoid capital gains tax on profits from the sale of appreciated property. Federal estate tax can be avoided with CRTs because when the trust-property is moved into a charity, it is removed from your estate; and is not subject to estate tax.
- Diversifying Your Investment Portfolio
You may have had a concentrated position in a stock or in real estate acquired at a low-cost basis. With a CRT, you won’t have to worry about paying tax on profit on these investments (capital gains). This means you can allocate these into a diversified portfolio that includes any asset class that you believe is risk appropriate.
- Retirement & Lifetime Cash Flow Planning:
CRT’s provide lifetime income, which is a valuable tool when it comes to retirement planning. It ensures a smooth flow of cash across a broad spectrum of life events.
It is important to remember that CRTs are irrevocable, meaning that once tax relief is granted for the sale of an asset, the relief can’t be revoked. The asset is also protected from claims by creditors since the asset is no longer in the donor’s books.
How the Trust Works
An Income Generating Tool
Once a CRT is created, the property is transferred to the trust where its value is determined. The annual income stream paid out to the beneficiary of the trust can be either a fixed percentage of the value, or a fixed dollar amount.
A Charitable Remainder Unitrust (CRUT), calculates the annual payment as a fixed percentage of the initial value of the assets in the trust. The trust is revalued annually, and the payout is recalculated based on the value of the principal assets. The percentage remains the same, but the amount of the annual payout can move up or down, tied to increases or decreases in the value of the principal assets. .
The Charitable Remainder Annuity Trust (CRAT), provides a fixed dollar amount payment to the beneficiary, based on the initial fair market value of the assets in the trust. This amount remains the same regardless of subsequent valuations.
Remember, in both the CRAT and CRUT, the IRS dictates that distributions to an appointed beneficiary be no less than 5% and no more than 50% annually. Furthermore, the charitable organization must receive at least 10% of the initial donation you made to the trust.
Creating a Philanthropic Legacy
The terms of termination of the trust are determined by the trust document, and the ‘remainder’ of the trust’s assets are then transferred to charity.
Is a Charitable Remainder Trust Right for You?
These are the basics of a Charitable Remainder Trust and how it serves as a legacy tool. If you’re interested in creating such an income generation and legacy tool for yourself or your loved ones, or simply have some more questions with regards to your retirement planning, call or write to us! We are here to help with all your retirement needs!
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.