Charitable remainder trusts (CRTs) offer a win-win solution for people who would like to make a substantial gift to an IRS-approved charity while also creating an income stream for themselves or their loved ones. In other words, it addresses charitable impulses as well as the practical need to plan for the future.
When you create a charitable remainder trust, you place assets (such as cash, stocks, and real estate) in the trust, and set a period of time during which the trust will make regular income payments to a recipient (or “income beneficiary”). Often, the recipient is yourself. The time period you set can also simply be your lifetime. Usually, the person or organization managing the trust (the “trustee”) invests the assets that can be invested. Once the set time period ends (or once you die, if you are the income beneficiary for life), the entire remainder of the assets left in the trust will pass to the charity you’ve designated.
A charitable remainder trust is an irrevocable trust, which means that once you create a CRT, you give up a great deal of control over it and can no longer modify it. (By contrast, the popular estate planning tool called a revocable living trust can be modified by its creator at any time.) For this reason, you would not rely on a CRT to provide for future emergency funds; once you set the income it generates, you cannot take out more than the set amount.
In addition to the gratification you’ll enjoy by donating to your favorite charity, you’ll be able to reap the benefits of many tax advantages.
One up-front benefit to creating a CRT is a hefty income tax deduction for the year you place assets in the trust. You can deduct from your taxable income the entirety of the trust assets minus the amount you expect to receive as income, capped at up to 60% of your adjusted gross income (AGI) that year. You can also carry forward any excess by taking deductions over five more years. (In certain situations, such as when the charity you select is what the tax code calls a “private non-operating foundation” rather than a public charity, or when you are donating appreciated assets rather than cash, the amount you can deduct will be capped at 30% of your AGI instead.)
Another significant benefit to a CRT is that you can avoid capital gains tax on the sale of the assets that you’ve placed in the trust. This can offer huge advantages if you own assets that have substantially appreciated.
Example: Fifteen years ago, Kimah bought stock for $100,000. Since then, the stock has appreciated considerably and is now worth $1,000,000. She establishes a CRT, designating herself as the income beneficiary for life, and places the stock in the trust. When the trustee sells the stock, the trust does not have to pay tax on the gains of $900,000—as Kimah would have, had she sold it on her own. Avoiding capital gains tax translates into significant tax savings—shared by Kimah, who now receives income from the CRT, and the charity that eventually receives the remainder of the trust. (It’s also worth noting that Kimah can use the current value of the stock—the full $1,000,000—for her income tax deductions.)
In other words, if you have an asset that has greatly appreciated, or that you expect will appreciate, you can use a charitable remainder trust to convert it into income without having to pay taxes on the appreciation.
Estates worth more than $11.58 million (in 2020)—or $23.16 million for couples—are subject to federal estate tax. (For more on estate taxes, see Estate Tax Versus Inheritance Tax.) If you set up a CRT in which you are the sole income beneficiary for life, the value of your CRT at your death—that is, the value of the trust assets that will pass to charity—will not count toward the $11.58 million threshold that triggers federal estate tax. (If you and your spouse are joint income beneficiaries, the CRT’s value also won’t count toward your combined $23.16 million threshold. But if one spouse is a non-citizen, this benefit does not apply to your spouse.)
You can set up your charitable remainder trust to provide income in one of two ways.
If the assets you want to place in your CRT are not liquid (for example, real estate), if you don’t expect them to produce a lot of income, or if you want to minimize the income you receive, you can also consider the following variations to the CRUT. These variations help you avoid the situation where the trust is forced to sell its assets in order to make the income payments each year.
To learn more about the ins and outs of charitable remainder trusts, or to set one up, consult an estate planning attorney. Charities that regularly deal with CRTs, such as large universities, can also be a great resource.