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Other Articles
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Trusts
Introduction to Charitable Remainder Trusts
By Henry V. Kaelber
President, Chief Investment Officer, Hoffman, White & Kaelber Financial Services, LLC
In our last article, we set the stage by discussing how philanthropy can be used to build a family’s wealth. Unless you read it, you might be asking yourself: How can I build wealth by giving it away?
We started the series by discussing how philanthropy can be a critical factor in the development and preservation of family values – for both their “human” and “intellectual” capital. We also talked about the three types of family wealth: human capital, intellectual capital and financial capital. And, we discussed how, for wealthy families, philanthropy can be voluntary or involuntary and the choice is quite simple. About half of a wealthy person’s estate will go to their heirs. And, the other half can either go to the government as taxes or it can go to charity.
As this article will be dedicated to introducing charitable remainder trusts, it may be worth going back through this site’s archives to read, or re-read, as the case may be, the “Using Philanthropy to Build Family Wealth” article before moving on…
CRTs Intro
It was 1917 when the US Government first provided an income tax deduction for gifts to religious, charitable, scientific or educational organizations. What was positive about this was that it provided a financial incentive for people to contribute to charitable causes; what made it less than positive was that it became a financial decision from a tax standpoint when and if to give to charity.
Thereafter, it wasn’t until the Tax Reform Act of 1969, that Congress gave a clear definition to a tax advantaged arrangement known today as the charitable remainder trust (CRT).
A charitable remainder trust is a legal arrangement that provides for specified payments to one or more non-charitable entities (the “income beneficiary”), with an irrevocable remainder interest in the trust property to be paid to a charity or charities (the “charitable remainder beneficiary”). Ordinarily, one must contribute total ownership in an asset to receive a charitable tax deduction. However, a handful of exceptions may apply and a CRT is one of them. Assuming that the CRT meets all the IRS requirements, contributions to it generally qualify for a charitable deduction for income, estate and gift tax purposes.
There are two basic types of CRTs – charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). The major difference between the two relates to how the income beneficiaries are to be paid: A CRAT would pay a fixed amount to income beneficiaries, at least annually, of a sum certain that cannot be less than 5% nor more than 50% of the initial fair market value of all property placed in the trust. Whereas, a CRUT provides for a varying payout, at least annually, based upon a fixed percentage of not less than 5% or nor more than 50% of the net fair market value of its assets as valued annually.
In the case of both trusts:
There can be to one or more income beneficiaries.
The term of the payout can be made as either the life or lives of an individual or individuals living at the time the trust is created, or for a term of up to 20 years.
For new trusts, the remainder interest must meet a minimum value requirement. The value of the remainder interest must equal at least 10% of the: (a) initial fair market value of the property placed in the trust, for CRATs; or, (b) net fair market value of the net fair market value of each contribution as of the date the property is contributed, for CRUTs. The IRS Code provides guidance for calculating these numbers.
After the term of the payout is completed, the trust principal is irrevocably transferred to the charitable organization.
Wow! Tell Me Again, Why Did I Need to Know About CRTs?
Trust me – pun intended – although what you just read must have certainly seemed like a lot of technical “mumbo-jumbo”, you were just introduced to an arrangement that could take your significant tax dollars and put them to some good charitable use. And, aside from the tax savings, you could receive a whole lot more value for your family and self in the process!
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