CRTs: The Who, What, Where, When, Why and How?
By Julie Dais, Director of Gift Planning
If you’ve represented charitable families over the years, you’ve certainly heard the term Charitable Remainder Trust, or a CRT. You might have even helped clients set them up, but for most attorneys, CPAs and financial advisors, CRTs don’t come along every day.
Because a CRT can be such an effective planning tool in certain situations, it’s useful to have at least a basic understanding of how they work.
Six Important Points to Keep In Mind:
What is it? Your client establishes a CRT as a standalone trust. The trust pays an income stream to the client (and potentially other beneficiaries such as a spouse or children) for life or for a period of years. According to the trust’s terms, whatever assets are left when the income stream ends will pass to a charity, such as your client’s fund at OCCF.
Where does the charitable deduction figure in? Because the transfer of assets to the CRT is irrevocable, your client is eligible for an up-front charitable income tax deduction in the amount of the present value of the charity’s future interest, calculated according to IRS-prescribed rules and interest rates. Remember also that assets held in a CRT are excluded from your client’s estate for estate tax purposes.
Who is it for? The ideal client to establish a CRT is typically someone who owns highly appreciated assets such as marketable securities, real estate or closely held business interests. That’s because a CRT allows these assets to be sold within the trust without triggering immediate capital gains taxes, enabling the proceeds to be reinvested.
Why are some trusts called CRATs and CRUTs? A Charitable Remainder Annuity Trust is a type of CRT that distributes a fixed dollar amount each year to the income beneficiary. Your client cannot make additional contributions to a CRAT.
A Charitable Remainder Unitrust, on the other hand, is a type of CRT that distributes a fixed percentage (at least 5%) annually based on the balance of the trust assets (revalued every year). Key Point: Your client can make additional contributions to a CRUT during their lifetime, a great retirement planning opportunity.
When is the best time to talk to your client about a CRT? The best time to discuss a CRT is when your client is considering ways to:
- Receive a current-year tax deduction due to a large taxable event.
- Receive an annual income payment stream for their life and/or the life of their beneficiaries.
- Grow investments tax-free.
- Minimize capital gains tax when selling appreciated assets.
- Creatively manage legacy planning, extending your client’s legacy for beneficiaries and charitable causes.
How can I learn more? Give us a call at 405.235.5603! Megan Davis and I are honored to be your first call for any questions about charitable giving techniques.
Creating a Charitable Remainder Trust is not the answer for everyone and may not be the right strategy for your client, but we can help you navigate the options and identify the strategies that best meet your client’s needs and extend their legacy.
We look forward to working with you!
The expert team at the Oklahoma City Community Foundation serves as a charitable giving resource to enhance the knowledgeable service you give your clients. We’ll help you structure a giving plan that maximizes tax advantages while achieving your clients’ charitable and financial goals. This newsletter is provided for informational purposes only. It is not intended as legal, accounting or financial planning advice.