Every year thousands of generous people leave a part of their final estate to worthy charities, leaving a legacy that will continue to help others after they have passed. Having taken care of their families, these Good Samaritans also help those less fortunate and in need of help and care.
But what if there were a way to be generous and receive a benefit while still living? There is—it’s an old estate planning tool called a Charitable Remainder Trust.
A Charitable Remainder Trust (CRT) is an irrevocable trust that pays the grantor or heirs an income for a specified period of time, with any remaining balance going to one or more qualified charities. A CRT can be funded with cash, stocks, bonds, real estate, private company interests, and non-traded stock. The trust retains a carry-over basis for all assets donated to the trust and the remainder cannot be less than 10% of net fair market value of the assets donated to trust. Additionally, the time period is limited to 20 years or the life of one or more of the non-charitable beneficiaries.
For their future generosity, the grantor receives a current tax-year charitable deduction that is based on the IRS section 7520 interest rate, among other factors. The interest rate used to calculate the remainder value is based on the rate in effect in the month the trust is funded. Generally, the higher the interest rate, the higher the charitable deduction created by a CRT. As interest rates have moved up, so has the IRS section 7520 interest rate, and thus has the remainder value calculation and the current year deduction.
There are a couple of variations of CRTs. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar income to the non-charitable beneficiary(ies). The dollar amount must be no less than 5% of the initial trust value and no more than 50% of the initial trust value. Generally, the present value of the annual income stream is determined and subtracted from the value of the property transferred to the trust to arrive at the value of the remainder interest. The factors for determining the present value of an income stream payable for the life of the noncharitable beneficiary are in Publication 1457, Table S, Single Life Factors and the present value of an income stream payable for a term of years are in Publication 1457, Table B, Term Certain Factors. There are slight adjustments that must be made for payments that occur other than annually at the end of the year, but your CPA should have software that can do those calculations for you.
The other CRT variation is a Charitable Remainder Unitrust (CRUT). In a unitrust, the percentage of the trust assets is fixed at between 5% and 50% of the initial trust balance, but the dollar amount of the distributions can fluctuate from year-to-year. Generally, the present value of the remainder interest (i.e., the charitable deduction) in a CRUT is determined by finding the present-value factor that corresponds to the trust’s adjusted payout rate. The present-value factor for a CRUT with an income interest payable for a term of years is in Table D, Term Certain Factors, of Publication 1458. The present-value factor for a CRUT with an income interest payable for the life of the noncharitable beneficiary is in Table U(1), Single Life Factors, of Publication 1458. If the income interest is payable for the lives of two individuals, use Table U(2), Last-to-Die Factors, in Publication 1458. You can use an online calculator to get a ballpark idea of the current tax deduction you could be entitled to, but your CPA will provide the final numbers for your income tax filing.
If you plan to leave any property to a charitable organization at your death, you should consider using a CRT now instead. It can reduce your income tax bill and provide additional funds for you to be even more charitable.