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What is a Charitable Remainder Trust (CRT)? We have talked about Charitable Remainder Trusts several
times in these newsletters, but it is time to do an encore. A Charitable Remainder Trust (CRT) is a trust
created during lifetime or by will that provides for a stream of annual payments for a lifetime or a term of years
following which the balance of the trust assets is paid over to designated charities. Thus, a donor or
members of a donor’s family can be assured of annual income, while the trust balance (called a remainder)
would go to charity.
Unique Tax Benefits. The IRC provides that a CRT is itself a charitable organization, which files annual tax
returns. Thus, the CRT pays no income taxes on its income. The individual beneficiary, of course, is taxed on
its trust distributions on a tier system, with ordinary income items such as interest, dividends or retirement
plan distributions as the highest level.
The portion of the trust passing to charity, computed in accordance with the amount of annual payments, the
length of time those payments are made, and the applicable interest rate at the time the trust is funded
qualifies for an estate or gift tax deduction. In the case of a CRT funded during lifetime, a charitable income
tax deduction is available.
Usually a donor is not especially concerned about the income tax treatment of the annual payments to the
individual beneficiaries, but wants to make sure that their quality of life is enhanced by the payments being
made. If the CRT is a Charitable Remainder Unitrust (CRUT), the beneficiaries may see a rising annual
payment if the value of the trust investment portfolio increases (but of course the reverse can also be true, the
annual payments could decline in the event the value of the portfolio declines).
Using Retirement Plans. Many charitable and educational institutions have been touting CRT’s as an ideal
way to dispose of all or part of a donor’s retirement plan assets. That is because the CRT can cash out the
plan without paying income tax. The assets received can be reinvested for satisfaction of the annual
payments required, with a view toward protecting the interests of the ultimate charitable beneficiaries as well
as the immediate annual beneficiaries.
If a donor has a charitable intent, and does not want to make outright gifts to charities or educational
institutions, a CRT is a magnificent compromise, to benefit both family members and intended non-profits.
This technique can be especially helpful if the individuals to be benefitted are elderly, in special need, or are
remote relatives, such as nieces or nephews. In all of these cases, the donor will be remembered by annual
payments, usually during the lifetime of the individual beneficiary, and still have his or her charitable wishes
carried out. It is a win-win situation, and works especially well where a donor has no immediate
descendants, or has descendants with special needs.
How is a CRT set up? A CRT can be established and funded during the lifetime of a donor. Generally, the
reason for lifetime trust creation is the avoidance of capital gain tax on assets contributed to the trust. Since
the trust is a charitable entity, there is no gain on sale, and 100% of the sale proceeds can be reinvested for
the benefit of the individual beneficiary.
A CRT can also be established at death as part of the donor’s living trust. In that case, the CRT is usually
established as a sub-trust. Alternatively, a CRT can be established by will (called a Testamentary CRT). In the
case of a Testamentary CRT a donor should work with qualified counsel so that it is clear ahead of time
whether a probate proceeding will be required using a Testamentary CRT.
Another alternative which is sometimes suggested is the establishment of a CRT during lifetime, in order that
it can be a designated retirement plan beneficiary. Lifetime funding can be confined to a nominal amount
such as $100.00. Such a CRT can be a compromise, avoiding any probate possibility, and springing into life
as a separate entity at the death of the donor, when the retirement assets are used to fund the trust.
Conclusion. A CRT can be a valuable tool in estate planning for intended charitable beneficiaries and family
members. Both can be benefitted greatly. Whether the CRT takes effect at death or during life depends on
many factors, most of which are governed by a donor’s intentions. If you have clients would could benefit by a
review of their estate planning needs and a discussion of the benefits of a CRT, please call Jim Modrall at
(231) 941-9660 or any of the other attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
times in these newsletters, but it is time to do an encore. A Charitable Remainder Trust (CRT) is a trust
created during lifetime or by will that provides for a stream of annual payments for a lifetime or a term of years
following which the balance of the trust assets is paid over to designated charities. Thus, a donor or
members of a donor’s family can be assured of annual income, while the trust balance (called a remainder)
would go to charity.
Unique Tax Benefits. The IRC provides that a CRT is itself a charitable organization, which files annual tax
returns. Thus, the CRT pays no income taxes on its income. The individual beneficiary, of course, is taxed on
its trust distributions on a tier system, with ordinary income items such as interest, dividends or retirement
plan distributions as the highest level.
The portion of the trust passing to charity, computed in accordance with the amount of annual payments, the
length of time those payments are made, and the applicable interest rate at the time the trust is funded
qualifies for an estate or gift tax deduction. In the case of a CRT funded during lifetime, a charitable income
tax deduction is available.
Usually a donor is not especially concerned about the income tax treatment of the annual payments to the
individual beneficiaries, but wants to make sure that their quality of life is enhanced by the payments being
made. If the CRT is a Charitable Remainder Unitrust (CRUT), the beneficiaries may see a rising annual
payment if the value of the trust investment portfolio increases (but of course the reverse can also be true, the
annual payments could decline in the event the value of the portfolio declines).
Using Retirement Plans. Many charitable and educational institutions have been touting CRT’s as an ideal
way to dispose of all or part of a donor’s retirement plan assets. That is because the CRT can cash out the
plan without paying income tax. The assets received can be reinvested for satisfaction of the annual
payments required, with a view toward protecting the interests of the ultimate charitable beneficiaries as well
as the immediate annual beneficiaries.
If a donor has a charitable intent, and does not want to make outright gifts to charities or educational
institutions, a CRT is a magnificent compromise, to benefit both family members and intended non-profits.
This technique can be especially helpful if the individuals to be benefitted are elderly, in special need, or are
remote relatives, such as nieces or nephews. In all of these cases, the donor will be remembered by annual
payments, usually during the lifetime of the individual beneficiary, and still have his or her charitable wishes
carried out. It is a win-win situation, and works especially well where a donor has no immediate
descendants, or has descendants with special needs.
How is a CRT set up? A CRT can be established and funded during the lifetime of a donor. Generally, the
reason for lifetime trust creation is the avoidance of capital gain tax on assets contributed to the trust. Since
the trust is a charitable entity, there is no gain on sale, and 100% of the sale proceeds can be reinvested for
the benefit of the individual beneficiary.
A CRT can also be established at death as part of the donor’s living trust. In that case, the CRT is usually
established as a sub-trust. Alternatively, a CRT can be established by will (called a Testamentary CRT). In the
case of a Testamentary CRT a donor should work with qualified counsel so that it is clear ahead of time
whether a probate proceeding will be required using a Testamentary CRT.
Another alternative which is sometimes suggested is the establishment of a CRT during lifetime, in order that
it can be a designated retirement plan beneficiary. Lifetime funding can be confined to a nominal amount
such as $100.00. Such a CRT can be a compromise, avoiding any probate possibility, and springing into life
as a separate entity at the death of the donor, when the retirement assets are used to fund the trust.
Conclusion. A CRT can be a valuable tool in estate planning for intended charitable beneficiaries and family
members. Both can be benefitted greatly. Whether the CRT takes effect at death or during life depends on
many factors, most of which are governed by a donor’s intentions. If you have clients would could benefit by a
review of their estate planning needs and a discussion of the benefits of a CRT, please call Jim Modrall at
(231) 941-9660 or any of the other attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| July 2006 CHARITABLE REMAINDER TRUST, GREAT BENEFICIARY by James R. Modrall III, J.D., C.P.A. |