How a Charitable Remainder Trust Works
A charitable remainder trust, or CRT is a “split interest” trust. This means that 2 parties have an interest in the trust. You as the donor are the income beneficiary and a charitable organization, like your DAF at Crewe Foundation is the remainder beneficiary. A CRT is a giving vehicle that allows you to make contributions and generate a partial tax deduction, based on the CRT’s assets that will pass to charitable beneficiaries. You or a beneficiary you name in the trust receives a distribution of income for life or for a fixed term of years, with a maximum 20, and then name a charitable organization to receive the remainder of the donated assets.
There Are Two Main Types of Charitable Remainder Trusts:
The first and most common is known as a charitable remainder unitrust, or CRUT. A CRUT distributes a percentage of its assets to the income beneficiary on an annual basis. Each year the trust is revalued and the amount of distribution is adjusted based on the new value. With a CRUT, you can make additional contributions.
The second type of CRT is a charitable remainder annuity trust, or CRAT. With a CRAT the income beneficiary is distributed a fixed annuity each year based on the initial value of the trust. Adjustments are not made annually based on the value of the trust assets like a CRUT. Also, donors are not allowed to make additional contributions to a CRAT.
For the purpose of this illustration we’ll use a CRUT as an example.
How a CRUT Works
- You, the donor, make a contribution to the CRUT You can donate cash, publicly traded stocks, bonds, mutual funds or exchange traded funds. You can also donate non-publicly traded assets such as some privately held stocks, business interests, cryptocurrencies and real estate. When you make a contribution you eligible to take a partial tax deduction. The partial income tax deduction is based on the type of trust, the term of the trust, the projected income payments, and IRS interest rates that assume a certain rate of growth of trust assets.
- You or your chosen beneficiaries receive an income stream Based on how you set up the trust, you or your stated beneficiaries can receive income annually, semi-annually, quarterly or monthly. Per the IRS, the annual annuity must be at least 5% but no more than 50% of the trust’s assets.
- After the specified timespan or the death of the last income beneficiary, the remaining CRT assets are distributed to the designated charitable beneficiaries. When the CRT terminates, the remaining CRT assets are distributed to the charitable beneficiary, which can be public charities or private foundations. Depending on how the CRT is established, the trustee may have the power to change the CRT’s charitable beneficiary during the lifetime of the trust.