Estate Planning 101 Series Lesson 1: Charitable Remainder Trusts

Charitable Remainder Trusts (CRTs) are an essential estate planning tool for clients who wish to match their philanthropic goals with a fixed income stream, either for themselves or their loved ones (e.g. kids).  They work ideally with low-basis assets such as stock, but can receive any property – cash, real estate, or a retirement account.  Even though the CRT is an irrevocable trust, you can retain the right to change the remainder charitable beneficiaries.

With the SECURE Act changes at the end of 2019, CRTs are being utilized to mirror the now-eliminated ‘lifetime stretch’ of inherited IRAs.  CRTs provide a way for clients to pass a lifetime income stream to their children, without losing over 1/3 of the IRA to income taxes.

Example 1 – Gift During your Lifetime:

You have 5,000 shares of XYZ stock.  You purchased or were granted that stock for $1/share.  The stock is now worth $100/share.  If you sell the stock, you will incur massive capital gains taxes.  If you keep the stock and die with it, there is a chance it will receive a step up in tax basis (although changing legislation could eliminate this!), and the value will be included in your estate for tax purposes.

You are not quite ready to gift the stock entirely, but you would like some to go to charity at your death.  You may be the perfect candidate for a CRT!  You can give the 5,000 shares to the CRT.  The stock can be sold by the CRT and no capital gains tax due.

The value can be invested under the CRT and you can receive an annual income stream for your lifetime (and your spouse’s or others), or for a term up to 20 years.  At your (or the beneficiary’s) death(s) or the end of the term, anything remaining in the CRT goes to the charity(ies) of your choice. You also receive an income tax deduction in the year of the gift to the CRT.  A perfect outcome to match your charitable goals and need for lifetime income.

Example 2 – Naming a CRT as your IRA beneficiary

You have a retirement account worth $1,000,000.  If you name your adult child as beneficiary of this IRA, then your child will inherit the IRA outright (which is included in your estate for tax purposes).  Your child will have 10 years to take a full distribution from the IRA.

Your child could take the entire $1,000,000 in year one (paying income tax at the highest tax rate and losing well over 1/3 in taxes), he could take 1/10 or another % out over the 10 years, or all in year 10.  At the time of the distribution, it is reported by your child as income.  Once distributed to the child, it is in his discretion to spend or invest, subject to his creditors, subject to divorce, etc.

If you prefer your child only receive an annual income stream for life, similarly to the old IRA stretch rules, and you have philanthropic goals, a CRT could be the best fit!  The CRT is named as the beneficiary of the IRA.  At your death, the IRA account is distributed to the CRT and does not pay income taxes.

The $1,000,000 can be invested and your child can be named as a lifetime or term beneficiary of the CRT.  At the child’s death or end of term, the balance goes to charity.  Your estate will also receive a partial charitable deduction for the gift to the CRT.

If you would like to explore whether a CRT is the right option for you, contact us today!