Do you have highly appreciated assets that may be subject to substantial capital gains taxes? Do you want to receive income of those assets at a rate higher than what they are now earning and receive income tax and estate tax benefits?
In a charitable remainder trust (CRT), an irrevocable gift is made to a tax-exempt irrevocable trust. You get back a stream of payments for life. The trustee manages the assets in the trust, makes required payments to the beneficiary and files the annual tax reports for the trust. A CRT is most advantageous with highly appreciated assets. One of the main benefits of these trusts is that you can donate assets whose value has grown significantly while avoiding the tax on the long-term capital gain on contributed appreciated property.
Video: Learn more about Charitable Remainder Trusts
The difference between CRATs and CRUTs:
CRTs come in two basic forms: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). The major difference lies in the formula used to calculate payments to the income beneficiary.
The CRAT provides for a fixed annuity rate for the life or lives of named individuals. Once the rate is set in the trust, it is multiplied by the value of the initial contribution to determine the lifetime annuity payments. These payments never change throughout the term of the trust. The lowest rate allowed by law is 5%. If a rate is set too high, the trust may not qualify for tax benefits. Payments may be made as frequently as quarterly.
The CRUT also provides for a fixed rate. The fixed rate is multiplied by the value of the assets in the CRUT as determined annually on the last business day of the calendar year or the first business day of the next year. A unitrust’s annual payments vary with the trust’s annual revaluations. For that reason, your payout would be more closely tied to investment markets. Assuming the assets in the CRUT increase in value over the prior annual period, the payments to the individuals in the next year will also increase by the fixed rate multiplied by the increase in value. The CRUT is anticipated to be a hedge against inflation.
Which is right for you?
CRUTs are often used for contributions of illiquid assets such as real estate or works of art. They are often recommended for donors with a longer life expectancy who seek inflation protection and can usually assume more risk. By contrast, CRATs are often considered most appropriate for older donors who seek protection from market swings and to whom inflation protection is less important.
What makes a CRAT or a CRUT an attractive option for you?
- A fixed rate of return usually greater than earned previously on the contribution.
- Avoidance of tax on the initial long-term capital gain on contributed appreciated property.
- A current income tax charitable deduction for the value of the future charitable gift.
- Avoidance of estate taxes on the contribution and its appreciation in the trust.
If you want more information, please contact Sabine McMullen at 212 613-1366 or plannedgiving@HIAS.org.