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What is a Charitable Remainder Trust?
The Charitable Remainder Trust (“CRT”) is a trust set up to generate revenue for a beneficiary while also ensuring a charitable donation in the future. CRTs are formed to distribute income to a beneficiary or beneficiaries for a specified period of time, and once that time elapses, the remainder of the money is gifted to one or more charities of the trustor’s choosing.
CRTs are tax-exempt, which helps to reduce the beneficiary’s taxable income. CRTs are also irrevocable, which means the trustee cannot terminate the trust nor can the trustor rescind their donation.
How Do CRTs Work?
There are two types of CRTs:
- charitable remainder annuity trusts (“CRATs”) and
- charitable remainder unitrusts (“CRUTs”).
The primary differences between them are two-fold. First is how often beneficiaries receive payments. CRATs distribute a fixed annuity each year while CRUTs distribute a fixed percentage of the trust’s assets periodically throughout the year. The second is whether additional contributions are permitted after the CRT’s initial formation. CRUTs allow for additional contributions, while CRATs do not.
The CRT will distribute payments to noncharitable beneficiaries for a specified period of time or for the life of the designated beneficiaries. Following such time, the remainder of assets in the CRT will be donated to one or more charities of the trustor’s choosing. Because at least some of the CRT’s assets will be donated to charity, the trustor is granted a partial tax deduction when contributing to the CRT.
Advantages to Creating a CRT
The primary reason to create a CRT is to reduce taxes. CRTs are exempt from federal taxation, meaning investment income generated by the CRT’s assets are not taxed.
Additionally, CRTs help preserve the value of highly appreciated assets. By donating assets to the CRT, the asset’s fair market value is not reduced by capital gains taxes, ensuring more money for investment purposes and, eventually, the beneficiaries.
Philanthropists wishing to create a trust which guarantees a stream of income for themselves or designated noncharitable beneficiaries may want to consider forming a CRT. Be aware, however, that CRTs are irrevocable. Therefore, it is always best to consult an attorney before creating a CRT to verify that it is complying with federal and state law as well as to prevent mistakes that cannot be undone due to the CRT’s irrevocable nature.
Kyler Mejia is a third-year law student at Arizona State University law school and legal extern with Caritas Law Group, P.C. Caritas Law Group, P.C. advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide as well as donors with regard to major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.