The Charitable Remainder Trust

A planning strategy that can turn low yields and high income taxes into high yields and lower income taxes.

By Barrett Parker and Mark Grunder

As we are all painfully aware, in our current financial environment yields are extremely low, and the top federal income tax rates were recently increased for ordinary income to as high as 43.4%, while long-term capital gains rates increased to as high as 23.8%. What can you do in such a financial situation? Well, if you are charitably inclined and are interested in a planning strategy that can provide increased income while simultaneously lowering your total income tax, consider the well-known and established Charitable Remainder Trust [CRT].

"If you are charitably inclined, would like to receive a higher yield, receive a substantial charitable income tax deduction and defer your capital gains tax, a Charitable Remainder Trust can help in a big way."

How does it work?

1) You decide:

  • Who the income beneficiaries will be – generally, that is either you or you and your spouse
  • Who the remainder charitable beneficiaries will be
  • What will the annual payout rate be – generally, it must be at least 5% of the value of the assets in the CRT
  • How long will the CRT last – if you designate a number of years, it cannot be for more than 20 years; if you designate your lifetime or joint lifetimes (husband and wife, for example), it can be for more than 20 years
  • How much you will contribute to the CRT. Which assets you will contribute to the CRT – for example, appreciated assets such as securities, real estate, a business with a recent valuation, and/or cash
  • Who will be the trustee[s]

2) You choose between the two main types of CRTs—a Charitable Remainder Unitrust or a Charitable  Remainder Annuity Trust. Here are the primary differences:

  • Remainder Unitrust - Can make additional contributions after the initial funding at any time. Annual payout is based upon annual value of the trust
  • Remainder Annuity Trust - No additional contributions permitted. Annual payout is static

3) Your attorney prepares the legal document for the CRT.

4) You fund the CRT with assets.

5) During the term of the CRT, the income beneficiaries receive monthly, quarterly or annual payouts.

6) You receive an immediate charitable deduction based on the computed remainder interest that eventually goes to your chosen charity(ies). If you do not use all of the deduction in the initial year, you can deduct the balance over the next five years. If appreciated assets are contributed to the CRT, you can deduct up to 30% of your Adjusted Gross Income for the year.

7) At the end of the CRT, the remaining assets are distributed to your chosen charities.

As you can see from this example, there are immediate income tax benefits, as well as increased income. Thus, the CRT strategy can easily be seen as a very effective retirement income supplement.

Other key benefits include:

  • Significant delayed gift to your favorite charity[ies] at the termination of the trust
  • Charities may be changed/removed by you at any time even after funding
  • Estate tax deduction
  • Deferral and possible reduction in recognition of capital gain taxes

As with all planning strategies there are other considerations and offsets, including:

  • At termination, the assets will be distributed to charities, not to your children or grandchildren
  • Lack of liquidity: once the trust is funded, the assets no longer belong to you
  • The CRT is irrevocable – it cannot be undone
  • Set-up costs for attorney to prepare the legal document
  • Annual tax returns
  • Trustee fees

In summary, if you are charitably inclined, would like to receive a higher yield, receive a substantial charitable income tax deduction and defer your capital gains tax, a Charitable Remainder Trust can help in a big way. Your BB&T Wealth advisor, in conjunction with a BB&T Financial Planning Strategist, can provide objective and highly experienced advice.

Barrett Parker is a Certified Financial Planner, Accredited Estate Planner, Chartered Retirement Planning Counselor, Business Successor Planner, and Certified Mutual Fund Counselor. He earned his Bachelor’s Degree from Rollins College in Winter Park, Florida.

Mark Grunder is a Financial Planning Strategist. He has over 20 years of financial planning experience, has published articles on Financial Planning and is an active member of the Financial Planning Association. He holds a B.A. degree from the University of Maryland system.

This article originally appeared in the Summer 2013 issue of Wealth magazine.

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