Convert Appreciated Assets into Income with a Charitable Remainder Trust ("CRT")

by the Charitable Strategies Group

Schwab Charitable does not act as trust or custodian for charitable remainder trusts. Please consult your legal or tax advisor about your particular circumstances.

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A Charitable Remainder Trust (CRT) is a gift of cash or other property to an irrevocable trust. The donor receives an income stream from the trust for a term of years or for life and the named charity receives the remaining trust assets at the end of the trust term. The donor receives an immediate income tax charitable deduction when the CRT is funded based on the present value of the assets that will eventually go to the named charity.

• Convert Appreciated Assets into a Lifetime or Retirement Income Stream. CRTs can be structured to defer the payment stream and provide an effective income during retirement.
• Couple a CRT with a Donor-Advised Fund (DAF). If a donor decides to change the named charity as beneficiary, a trust amendment must be created resulting in additional legal fees. By naming a Schwab Charitable donor-advised account as the CRT beneficiary, the donor can freely change the identity of the benefitting charities at no additional cost. Moreover, the donor can control the amount and timing of the distributions to the charity, and can continue to advise on how the charitable dollars are invested.
• Reduce Your Taxes with a Charitable Income Tax Deduction. If the CRT is funded with cash, the donor can use a charitable deduction of up to 60% of Adjusted Gross Income (AGI); if appreciated assets are used to fund the trust, up to 30% of their AGI may be deducted in the current tax year. In addition, if the donor cannot use the whole deduction in the year of the gift, he/she can carry over the deduction for up to five additional years.
• Defer Capital Gains Tax. Charitable remainder trusts are particularly suited for appreciated property because any capital gains tax will be deferred until the time that it is distributed out to the income beneficiary. Therefore, a donor can contribute highly appreciated concentrated positions to the CRT and diversify his/her position in a tax-effective manner as the tax burden will be spread out over time.
• Reduce or Eliminate Estate Taxes. Because it is irrevocable, assets contributed to a CRT may be removed from your estate for estate tax purposes
• Potential Gift Tax Consequences: A donor will usually create a CRT and designate themselves as an income beneficiary. However, the donor can name other non-spouse non-charitable beneficiaries to receive the income from the CRT. If they do, there is a taxable gift to the non-spouse beneficiary when the CRT is funded. The value of the gift to the non-spouse beneficiary is reduced to the present value of the future income payments.
• Unitrust payouts are taxable. With a CRT, the donor must pay tax on the income stream, which is categorized into four tiers: (1) Ordinary income and qualified dividends, (2) capital gains (short-term, personal property, depreciation, long-term gain), (3) other tax-exempt income; and (4) return of principal. Only when a higher tier of income is exhausted does the next tier apply.

For donors seeking a current or future income stream, a CRT coupled with a DAF may be a great option. Donors should work with a qualified estate planning attorney and tax advisor to confirm that a CRT will provide the expected results both respect to the income tax consequences of the gift as well as the administration of the CRT.