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Friday, February 28, 2020



A charitable remainder trusts benefits you and your favorite charity

Are you a multitasker? If so, you may appreciate an estate planning technique that can convert assets into a stream of lifetime income, provide a current tax deduction and leave the remainder to one of your favorite charities — all in one fell swoop. It’s the aptly-named charitable remainder trust (CRT).

CRTs have been around for decades, and they remain a viable estate planning strategy in the wake of the Tax Cuts and Jobs Act (TCJA) and other recent tax legislation.

A CRT in action

For starters, you may set up one of two CRT types (see the sidebar “2 Types of CRTs” at x) and fund it with assets you own. The trust then pays out income to the designated beneficiary or beneficiaries — for example, the trust creator or a spouse — for life or a term of 20 years or less. Alternatively, if certain requirements are met, you can choose to have income paid to your children, other family members or an entity.

If it suits your needs, you may postpone taking income distributions until a later date. In the meantime, the assets in the CRT continue to appreciate in value.

Typically, a CRT is funded with income-producing assets, such as real estate, securities and even stock in your own company. (Note: S corporation stock can’t be used for this purpose.) These assets may be supplemented by cash deposits or the transfer can be all cash.

When you transfer assets to the CRT, you qualify for a current tax deduction based on several factors, including the value of the assets at the time of the transfer, the ages of the income beneficiaries and the Section 7520 rate. As a general rule, the greater the payout, the lower the deduction.

Because the TCJA limits certain itemized deductions and increases the standard deduction, consider transferring assets in a year in which you expect to itemize. Furthermore, the deduction for appreciated assets is generally limited to 30% of your adjusted gross income (AGI). However, if the 30% of AGI limit applies, you can carry forward the excess for up to five years.

A matter of control

An important decision relating to a CRT is naming the trustee to manage its affairs. The trustee should be someone with the requisite financial acumen and knowledge of your personal situation. Thus, it could be an institutional entity, a family member or a close friend, or even yourself.

Due to the significant dollars at stake, many trust creators opt for a professional, perhaps someone who specializes in managing trust assets. If you’re leaning toward this option, interview several candidates and choose the best one for your situation, taking into account factors like experience, investment performance and level of services provided.

If you decide to take on the task on your own, you might use a third-party professional to handle most of the paperwork and provide other support. Frequently, a CRT is supplemented by another trust or a life insurance policy to “make up the difference” to children when the remainder goes to charity.

During the term of the CRT, it’s the trustee—not the charity—that calls the shots. The trustee is obligated to adhere to the terms of the trust and follow your instructions. Thus, you still maintain some measure of control. In fact, you may retain the right to change the trustee if you become dissatisfied or designate a different charity to receive the remainder assets.

Is a CRT right for you?

The short answer is that it depends on your specific circumstances. Be aware that a CRT is irrevocable. In other words, once it’s executed, there’s no going back and you can’t make other changes. So you must be fully committed to this approach. Contact your estate planning advisor for additional details.

[SIDEBAR] 2 Types of CRTs

There are essentially two types of charitable remainder trust (CRTs): the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). No matter which version you use, the income beneficiary must be entitled to annual payments for his or her lifetime or a period of no more than 20 years. In addition, other tax law requirements apply.

With a CRAT, the income beneficiary receives a fixed amount of income year-in and year-out, regardless of the investment performance of the trust assets. Individuals who have already retired and want the security of a known income amount often prefer this method. The trust is usually funded with securities and/or cash.

The tax law requires the fixed payments of a CRAT to equal to 5% of the initial value of the trust assets.

Unlike the CRAT that pays out a fixed amount, CRUT payments are based on the investment performance of the underlying assets. Therefore, the amount of your annual income will fluctuate year-to-year. With a CRUT, a payment of a percentage of not less than 5% of the value of the trust assets must be paid each year.

In either event, a trust won’t qualify as a CRT if the annual payout exceeds 50% of the value. Furthermore, it must be clear that

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