IS A CHARITABLE REMAINDER TRUST THE RIGHT CHOICE FOR YOU?
BY WALTER DASZKOWSKI
In 1969, the U.S. Congress created a new type of trust that helped charities and other not for profit organizations generate more revenue for their causes commonly known as a Charitable Remainder Trust, or CRT. In essence, this is a legal vehicle enabling the grantor, at some time in the future or at his/her death, to direct assets towards charitable causes. In return, the grantor may receive a lifetime income stream, along with current income and future estate tax deductions.
First, create and place assets into a CRT. You may continue to manage the assets and receive an income stream during your lifetime. The charity or charities you designate receive the residual of the trust’s assets after you pass away.
In return for what amounts to a pledge of assets to charity in the future, the donor of the assets placed in the trust receives a current tax deduction for the donation and avoids any and all capital gains on the donated assets. The amount of the deduction is calculated in part based on the age of the last income beneficiary. In addition, the donor receives partial or full elimination of the asset gifted from Federal Estate Tax calculations.
CRTs are irrevocable trusts that actually provide for and maintain two sets of beneficiaries. The first is the income beneficiaries (typically you, and, if married, a spouse). The second set are the charities you name, which receive the principal of the trust after the income beneficiaries pass away. Income beneficiaries receive an income stream from the trust representing either a set percentage of trust assets or a specified dollar amount.
CRTs do not pay capital gains taxes, which can range from 20% to 35% depending on the state you live in. For this reason, they are ideal for assets like stocks or real estate with a low cost basis but high appreciated value.
The amount of income to come out of the CRT depends upon the payout percentage you choose, and the amount of income your assets generate while inside the trust. The IRS states that a CRT must distribute at least 5% of the net fair market value of its assets. When setting the payout percentage, the higher it is, the lower your charitable income tax deduction.
INCOME AND ESTATE TAXES
A CRT is considered “outside of your estate” by the IRS. Because of this, you may end up saving a large portion of your assets if exposed to the estate tax.
Average deductions normally fall in the range of 20 to 50% against your adjusted gross income. Any deductions not used in the year of contribution may be carried forward for the next five years.
It is prudent to hire an attorney to construct and write the documents necessary to create a CRT. Lastly, if there is a concern that your intended heirs are losing out on inheritance due to the assets being pledged to the trust, the donor could utilize several cost effective life insurance related strategies that can be purchased to provide an inheritance for intended heirs.
Walter Daszkowski, CPA, PFS
Daszkowski, Tompkins, Weg & Carbonella CPA, P.C.
1303 Clove Road, Staten Island
T: 718.981.9600 Option 1 / F: 718.981.9601
278 Route 34, Suite 1 & 2, Matawan, NJ wdcpa.com