Charitable Remainder Trusts: 3-for-1 Financial Planning

May 20, 2021
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We’ve been having a lot of conversations about Charitable Remainder Trusts lately, spurred on by concerns about decreasing estate tax limits and changes in IRA beneficiary pay-outs.

Charitable Remainder Trusts let you get a charitable deduction without missing out on portfolio income, and can be helpful in reducing estate taxes, so provide a 3-for-1 in terms of financial planning.

There is a lot of talk about lowering the amount of money you can leave to your heirs without an estate tax (the estate tax exemption limit). It’s currently $11.7 million per person, but sunsets in a few years back to $5 million, adjusted for inflation. There are proposals on the table to reduce it even further, $3.5 million most recently.

If you have or anticipate assets over the exemption limit, there are a number of strategies to avoid the 40% (45% proposed) estate tax. All involve getting the “excess” assets out of your estate one way or another, now or upon your death. One of these strategies is to create a Charitable Remainder Trust.

Depending on their structure, these can go by the acronyms of CRT, CRUT or CRAT. I’ll provide a simple description of how a Charitable Remainder Trust might work, we would need to talk about your goals and charitable interests to get specific on which structure would work best for you.

Who might want a Charitable Trust? A person with

  • Charitable interests, defined or general,
  • Desire to get money out of their taxable estate,
  • Current need for a significant tax deduction
  • Income needs from the investment.

Let’s use an example – I’ll call her Bonnie.

Bonnie anticipates her estate will exceed the exemption limits and $1,000,000 is at risk of estate taxes. That would mean $400,000 in taxes upon her death.

Instead, Bonnie creates a Charitable Remainder Trust.

She’ll fund the trust with $1,000,000, decides how much income she’ll receive from the Trust over a certain number of year or for her lifetime, and when she dies or the trust terminates, the remaining balance goes to her favorite charity.

Bonnie will get a tax deduction when the money goes into the Trust. It’s not a 100% charitable deduction, because the money is encumbered by the income it pays Bonnie and the period of time the charity has to wait to receive the principal; it’s a discounted tax deduction. Depending on the structure, the deduction calculation starts with the present value of the income stream or the amount of money expected to go to the charity, then goes through some testing and additional calculations to determine the allowable deduction.

Bonnie also avoided the estate tax on these assets.

When should you consider a Charitable Remainder Trust strategy?

  • When a dental practice or office building is sold, this may be a strategy to consider to help offset a big tax bill. Cash for making the donation is available, a significant tax deduction would be helpful, but retirement income may still be needed, as a replacement for the paychecks that had been coming from the practice or the rent from the building.
  • When you’re doing an estate evaluation and want to get money out of your taxable estate and have a charitable intent long term, but currently have a need for income (for yourself, or someone you are responsible for).

There are other uses for Charitable Remainder Trusts, these are the most common.

The income you receive can be based on a fixed percentage of the money you put into the Trust, the actual earnings on the investments in the Trust, or a combination. The income you receive from the Charitable Remainder Trust is taxable, not dissimilar to the taxation on a normal investment income stream, but it does require some special calculations.

You’ll need an attorney to create the trust, and an experienced CPA or tax attorney to file a tax return every year. Let's discuss the details of how a trust might be beneficial to you.