This time of year, many of us are taking advantage of the most common form of charitable giving and writing the annual check. Toss in a few fundraising events and a gala or two and you’ve run the gamut for most givers. However, for certain high wealth donors, particularly those with significantly appreciated assets looking to maximize the impact of their giving while also reaping all the available tax benefits, many other vehicles exist including the Charitable Remainder Trust (CRT).
The How of a CRT
A CRT involves the selection of a particular asset suitable for funding the CRT. This can be stock, a mutual fund, real estate, cash or the like. Preferably an asset that has undergone significant appreciation during the time the donor has held it, although this does not have to be the case. Typically, with the assistance of a financial manager, the donor then passes the asset into the CRT, which is an irrevocable trust. The trust then sells the asset and reinvests the proceeds into an income generating portfolio. At the same time the donor specifies a recipient of the income (normally themselves) and a period during which they should receive that income (often the balance of their life), and a charity, or charities, to receive the “remainder” of the trust when the recipient no longer takes income from the trust (typically upon the death of the last recipient). That is to say, when the income stream is ended at a predetermined time/event, the charity receives the remaining value of the trust.
Variations on a Theme
There are a number of options available when setting up a CRT, including, but not limited to, designating heirs as recipients to the income, specifying a time limit on the income stream, and even investing part of the income into a life insurance policy with designated beneficiaries so the donor might provide for both a charity and their heirs.
The Why of a CRT
First and foremost, it is an effective way to leave a legacy to good causes with the full value of highly appreciated assets. Moving them into the trust tends to insulate them from market volatility. And of course, there are the tax advantages. In most cases, an income tax deduction is available at the funding of the trust, while the appreciation of the asset is no longer subject to capital gains taxation, and no longer being a part of the donor’s estate, is no longer subject to estate tax.
The Fine Print
Needless to say, there are significant IRS regulations regarding a CRT and one is wise to involve their wealth management team in structuring this popular vehicle of charitable giving. However, a CRT is a powerful and mutually beneficial tool for a donor and a charity.
In future blog posts we will investigate other options to maximize the benefits of charitable giving to the donor, their heirs and the charity. If you are seeking assistance with setting up such a trust, please contact us for a free initial consultation.