Castle Estate Planning: Charitable Remainder Trusts
By: Bruce Alan Danford
We frequently wish to give to our favorite charities and yet we worry over meeting our other obligations and responsibilities. Wouldn’t it be great if there were a way we could do both? Well one way we can do both is through a charitable remainder trust.
A charitable remainder trust (CRT) is an irrevocable trust with a set term in the number of years or for the lifetime of the beneficiary. During the life of a CRT, an amount is distributed to a beneficiary for the term of the trust, after which the rest is given to a designated charity. The amount given may either be a set dollar amount given as an annuity in which case the CRT is known as a charitable remainder annuity trust (CRAT) or the amount may be a percentage of the total trust’s value on a given day each year in which case the trust is known as a charitable remainder unitrust (CRUT).
Each form of CRT has advantages and disadvantages. Both have the ability to give a portion of the CRT to someone, such as a child, relative, or even yourself, each year with the remainder after the term going to the charity. Both forms of CRT give the person who sets up the trust a charitable income tax deduction in the year the trust is established. Both may be set up during your life or in your will.
A CRAT, with its fixed dollar amount allows for certainty as to the amount received each year by the beneficiary. However, once the CRAT is established additions to the trust are not permitted. This may be offset by the ease of administration and lower administrative costs. There can also be some uncertainty of how much will be left to the charity at the end of the term. If every year the trust is required to distribute a set dollar amount but the trust did not have enough income to meet that amount, the amount left to the charity will have decreased.
In a CRUT there is a great deal more flexibility. After the trust is established additional amounts may be contributed to the trust. Also a CRUT can be setup to pay a fixed percentage of the trust amount each year or the net income of the trust each year whichever is less. Furthermore, if the CRUT pays less than the set percentage for a number of years the CRUT can be setup to makeup the shortfall in a year the trust has sufficient income to do so. This can also make a nice retirement planning tool. As in the CRAT, after the term of the CRUT the remainder amount would go to the charity.
Now let’s examine a few of the possible uses of a CRT.
Scenario I
Bob’s son, Fred, died recently leaving a young wife, Wilma, and a three year-old son, Sonny. Fortunately, Fred had taken out life insurance to provide for Wilma and Sonny. Bob is worried Wilma may not be prudent with the money, squandering all of the money without leaving enough for Sonny to have funds for college or enough for a start when he leaves home as a young adult. Bob knows that as long as he is alive he can make certain Sonny is provided for. Bob also wants to leave something for his favorite charity, Charitable Friends. Bob is now 65 years old, widowed, and has approximately $2,500,000 in assets. . One solution is Bob could include in his will a provision that a CRAT will be formed upon Bob’s death that would pay a monthly amount to Sonny for a term of years such, as 20 years, after which time the remainder amount left in the trust would go to the charity. Bob’s estate would have an estate tax deduction based on the projected amount going to the charity, Sonny would have guaranteed income for 20 years, and Bob would rest easier knowing his grandson would be provided for financially.
Scenario II
Bob’s son, Fred, died recently leaving a young wife, Wilma, and a three year-old son, Sonny. Unfortunately, Fred had not taken out life insurance to provide for Wilma and Sonny and had left few assets. Bob is retiring from the MegaBig Company with an excellent retirement/pension package and a $1,500,000 cash bonus. Bob knows he has a very large income tax bill coming because of the large bonus. Bob has been very active in his charitable work and wants to leave something for his favorite charity. One solution is Bob could immediately form a CRT that would pay a monthly amount to Sonny for a term of years, such as 20 years, after which time the remainder amount left in the trust would go to the charity. Bob would have a current income tax deduction which would greatly help with the tax consequences form the $1,500,000 bonus, Sonny would have guaranteed income for 20 years, and Bob would rest easier knowing his grandson was provided for financially.
The uses of charitable remainder trusts can be infinitely complex and versatile. Assets which yield no current income, such as investment real estate, can be used to fund the trust. The disbursement of the annual benefit can be accrued and then when the property is sold the accrued benefits paid. From that point on the benefits could be paid as due.
There are many ways a charitable remainder trust can be designed to accomplish a myriad of goals. But isn’t it nice to be able to help your favorite charity and help yourself or your family?