A Brief Overview of the Charitable Remainder Trust

Do you have some stock, a house, or some other appreciated asset that you’d like to sell off and make money from now? If so, you’ll find that taxes will take a big bite out of how much money you can make.

Let’s say you bought shares in company for $50,000 a few years ago, and today those shares are worth $250,000 and you’re ready to cash in.

You gained $200,000 overall. At a federal capital gains tax rate of 15%, the government would take $30,000, and you’d be left with $220,000 of the shares’ $250,000 value.

But, if you donated the shares to create a charitable remainder trust (CRT) instead of selling them yourself, you—and potentially your future heirs—could receive a stream of income throughout your lifetime free of the capital gains tax, while also contributing to a beloved charity of your choice.

What Is a CRT?

A CRT is an irrevocable trust used for selling assets. It lowers the amount of tax you pay and benefits your favorite charity. Since CRTs are irrevocable, it is essential that you are fully committed to proceeding with its creation and donating a significant amount of wealth to charity. You will not be able to change your mind later.   

How Does It Work?

You, the grantor, will donate certain assets to an IRS approved charity in the form of a CRT. This removes these assets from your taxable income, which will lower the amount of federal income taxes you owe.

The charity will act as the trustee, administering the assets in a manner that produces income. For the rest of your life, the trustee will send you steady income from what those assets generate. When you die, whatever remains in the trust goes to a charity of your choice (this is why it’s called a charitable “remainder” trust).

This is a favorable tax arrangement for you, particularly for highly appreciated assets. Firstly, you will be eligible for a significant tax deduction thanks to your charitable donation. Secondly, the asset will not be included in your estate for the purposes of the estate tax when you pass way. Finally, the income generated from the asset and distributed to you throughout your life will be free of the capital gains tax. CRTs help you preserve a maximum portion of your wealth while also contributing to a good cause.

How Do I Get the Money?

There are a couple different ways the trustee could send you the income from your CRT:

  • Fixed Annuity: With this option, you receive the same dollar amount every year. CRTs make money from stocks and other income-producing assets that aren’t always consistent, so with a fixed annuity set-up you won’t make less money just because the economy is having a down year. Remember, though, that this is irrevocable. Once you open up a CRT and set the dollar amount you receive every year, you can’t change it.
  • Trust Asset Percentage: Instead of a fixed amount, you could choose to receive a percentage of what the trust is worth every year. You won’t be protected from bad years, but you stand to make a lot of money if your trustee’s investments pay off big. One note—the percentage has to be higher than 5%, per IRS regulation.

Have any questions about CRTs? Interested in creating one? Feel free to contact the Legacy Planning Law Group to discuss your options.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.