A Charitable Remainder Trust Primer
Spring is here and I find myself hoping that this year, April showers bring both May flowers and a light at the end of the 2020 tunnel. But, even with the sun shining and the tulips popping out above ground, your friendly neighborhood estate planning attorney is here to redirect your gaze six feet below ground.
With potential federal tax changes on the horizon, now may be a great time to reevaluate your estate plan. If you are charitably inclined, it’s particularly important to have a plan in place to help you achieve your philanthropic and tax planning goals; a charitable trust can be an efficient vehicle for achieving your objectives.
For those just getting up to speed with advanced estate planning lingo, the acronyms involved can make you feel like you’re diving into a bowl of alphabet soup, and charitable trusts are among the worst offenders – CRT, CLT, CRAT, CRUT, CLUT, CLAT, NIMCRUT, flip CRUT – who knew there were so many combinations? Here, we take a bird’s eye view and walk through the basics.
Types of CRTs
The most common type of charitable trust is a Charitable Remainder Trust (CRT). A CRT is an irrevocable “split interest” trust with charitable and non-charitable components. CRTs are created when a donor gifts property to a trust, names a non-charitable income beneficiary (commonly the donor him/herself either for life or for a set term of years) and names an ultimate charitable remainder beneficiary (or beneficiaries).
CRTs can be structured in different ways:
- Charitable Remainder Annuity Trust (CRAT) – Pays a fixed annual annuity amount to the non-charitable beneficiary. Regardless of whether the property in the trust increases or decreases in value, the annual payment remains the same.
For example, if a CRAT is established with $1 million and the donor retains a 5% annuity interest for life, the donor will receive $50,000 each year until his/her death or until the CRAT runs out of assets.
- Charitable Remainder Unitrust (CRUT) – Pays a fixed annual percentage to the non-charitable beneficiary. In contrast to a CRAT, a CRUT’s annual payment fluctuates based on increases or decreases in the trust’s value.
For example, if a CRUT is established with $1 million and the donor retains a 5% unitrust interest for life, the donor will receive $50,000 in the first year. The unitrust payment for subsequent years is determined by applying 5% to the beginning value of the trust principal for the year in which the payment is being made. Most clients utilize a CRUT structure because they expect the trust assets to appreciate over time, and they want to share in that growth.
It’s important to be aware of the following points before establishing a CRT:
- Payment limitations – For both CRATs and CRUTs, specific federal tax rules limit annual payment amounts to ensure the charity is projected to receive at least 10% of the initial asset value. This projected remainder is determined using a formula that accounts for an interest rate issued by the IRS and the term of the CRT, whether a fixed number of years or the life expectancy of the beneficiary per IRS age-based tables. Typically, CRAT annuity payments are set between 5-15% of the initial value of the trust property, and CRUT payments are between 5-50% of the yearly value of the trust property.
- Additional contributions – A CRAT cannot accept additional contri