Charitable remainder trusts (“CRT”) are a widely used and accepted charitable and estate planning tool. CRT’S allow donors to accomplish their charitable objectives and obtain immediate income tax advantages and estate tax relief.
Just as importantly, CRT’S are legally sound and IRS approved. The last several years have put tax lawyers and accountants on their heels – not to mention subject to criminal and civil penalties - as the IRS and the United States Senate Finance Committee have successfully targeted various abusive tax strategies. “Circular 230,” “Listed Transactions,” and “Tax Shelters” have become as integral to tax planning as the annual exclusion and valuation discounting. In contrast, CRT’S are statutorily approved as a fundamental planning strategy. With only minor Congressional tweaks since the statutory provisions were passed in 1969, donors and professionals can be assured that, if they meet the expressly prescribed rules, the charitable, income and estate tax advantages are guaranteed.
As practitioners in the charitable field are well aware, there are two types of CRT’S: a Charitable Remainder Unitrust and a Charitable Remainder Annuity Trust. Broadly stated, a Unitrust pays out a fixed percentage of the CRT principal to the donor, typically for the donor’s (or donor and spouse) lifetime. In contrast, an Annuity Trust pays to the donor a specific amount for a limited time. At the end of both types of CRT’S, the remaining principal passes to one or more charities chosen by the donor. As the two examples below illustrate, under either version the donor can calculate the benefits for both the donor and charity at the inception of the CRT. Both examples assume assets appreciate at five percent per year. Also, the numbers can change somewhat month-to-month because of the then prevailing federal interest rate.
Mr. and Mrs. Donor, both age 65, contribute $1 million to a CRT, using a Unitrust. They desire an annuity of six percent for their lifetimes. Their joint life expectancy is 25 years. Mr. and Mrs. Donor receive an income tax deduction of $293,110. According to IRS tables, for the next 25 years, as long as at least one of them is living, the CRT will pay them $47,000 to 60,000 per year. Upon the second death (whenever that occurs), the CRT will terminate. Depending on when death occurs, one or more public charities will receive somewhere between $990,000 to $777,000.
Mr. and Mrs. Donor, both age 65, contribute $1 million to a CRT, using an Annuity Trust. They desire to maximize the amount of the annuity they receive over the shortest period of time. Mr. and Mrs. Donor receive an income tax deduction of $120,000. According to IRS tables, for the next eight years, they receive $140,000 per year. At the end of eight years, one or more public charities will receive $110,000.
For individuals interested in charitable planning and receiving income and estate tax savings, CRT’S should be considered.