Charitable Remainder Trusts: Turn Appreciated Assets into Tax-Free Income

Charitable Remainder Trusts (CRTs) offer a sophisticated strategy for individuals who want to
support charitable causes while also generating income from appreciated assets. This article
explains how CRTs work and how they can be used to create a tax-free income stream.

Understanding Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to you or
other beneficiaries for a certain period, with the remaining assets going to a designated
charity at the end of the trust term.

How a CRT Works

1. Transfer Assets: You transfer appreciated assets (e.g., stocks, real estate) into the CRT.
2. Income Payments: The trust pays you or your beneficiaries a specified income each year.
3. Charitable Remainder: At the end of the trust term, the remaining assets go to the charity you choose.

Key Benefits of CRTs

• Tax Deduction: You receive an income tax deduction for the present value of the assets that will eventually go to charity.
• Deferral of Capital Gains: You can defer or potentially avoid capital gains taxes on the appreciated assets you transfer to the trust.
• Income Stream: The trust provides a regular income stream for you or your beneficiaries.
• Charitable Giving: You support a cause you care about.

Types of Charitable Remainder Trusts

1. Charitable Remainder Annuity Trust (CRAT)

The CRAT pays a fixed dollar amount to the beneficiaries each year.

2. Charitable Remainder Unitrust (CRUT)

The CRUT pays a fixed percentage of the trust’s assets, revalued annually.

Creating a Tax-Free Income Stream

While the income you receive from a CRT is generally taxable, the tax benefits of the trust can
significantly increase your overall after-tax income.

1. Deferring Capital Gains

By transferring appreciated assets to a CRT, you can defer paying capital gains taxes on those
assets. This allows the assets to grow within the trust, potentially generating more income.

2. Income Tax Deduction

The income tax deduction you receive when establishing the CRT can offset other taxable income,
increasing your cash flow.

Example

You own stock worth $500,000 with a cost basis of $100,000. If you sell it, you’ll owe capital
gains taxes on $400,000. Instead, you transfer the stock to a CRUT.

• You receive an income tax deduction.
• The stock is sold within the trust, avoiding immediate capital gains taxes.
• The trust generates income, which is paid to you.
• At the end of the trust term, the remaining assets go to your chosen charity.

Important Considerations

• Irrevocable Trust: A CRT is irrevocable, meaning you generally cannot change its terms once it’s established.
• Payout Requirements: There are rules regarding the percentage or amount of income that must be paid to the beneficiaries.
• Charitable Intent: CRTs are designed for those with genuine charitable intentions.
• Complexity: CRTs are complex legal and financial instruments.
• Professional Advice: Consulting with an attorney and financial advisor is essential.

Conclusion

Charitable Remainder Trusts can be a powerful tool for generating income and supporting
charitable causes. However, they are complex and require careful planning. Seek professional
advice to determine if a CRT is right for your financial and philanthropic goals.

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Frequently Asked Questions (FAQ)