Convert appreciated assets into income with a charitable remainder trust.
by Denise Schuh
Director, Donor and Advisor Solutions & Complex Assets
A charitable remainder trust (CRT) is formed by 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 charitable beneficiary receives the remaining trust assets at the end of the trust term. The donor receives a current-year charitable income tax deduction when the CRT is funded based on the present value of the assets that will eventually go to the named charity.
- CRAT vs. CRUT. A charitable remainder annuity trust (CRAT) differs from a charitable remainder unitrust (CRUT) in that it pays out a defined annuity, based on the fair market value of the assets as of the date the trust is funded. On the other hand, a CRUT pays a defined percentage of the assets revalued annually. Because of the difference in valuation methods, a donor may make additional contributions to a CRUT, but cannot make additional contributions to a CRAT.
- Convert appreciated assets into a lifetime or retirement income stream. The annuity or unitrust amount is determined by the donor at the time the trust is created. The payment amount may not be less than 5% of the fair market value of the assets at the time of contribution and not more than 50%. Moreover, the value of the remainder interest must be at least 10% of the fair market value of the assets of the trust as of the date of contribution. For donors seeking supplemental income in retirement, CRUTs can be structured to defer payment and provide an effective income stream.
- Couple a CRT with a donor-advised fund account. If a donor decides to change the named charity as beneficiary of a CRT, a trust amendment must be created, resulting in additional legal fees. By naming a Schwab Charitable™ donor-advised fund account as the CRT beneficiary, the donor can update or change the ultimate charitable beneficiaries of the donor-advised fund account at no additional cost. Moreover, donor-advised funds offer the flexibility for a donor to support charitable organizations over time, even after the donor’s death.
- Reduce your taxes with a charitable income tax deduction. If the CRT is funded with cash, the donor can file for a charitable income tax deduction of up to 50% of adjusted gross income (AGI); if appreciated assets are used to fund the trust, up to 30% of their AGI may be deductible in the current tax year. In addition, if the donor cannot use the whole income tax deduction in the year of the gift, the donor 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 to the income beneficiary. Therefore, a donor can contribute highly appreciated concentrated positions to the CRT and diversify in a tax-effective manner, because the tax burden will be spread out over time.
- Unitrust payouts are taxable. With a CRT, the donor must pay tax on the income stream, which is categorized into four tiers. Only when a higher tier of income is exhausted does the next tier apply:
Ordinary Income (investment income that is not qualified dividends)
- Short-Term Gain
- Tangible Personal Property Gain
- Depreciation Gain
- Long-Term Gain
Other Income (tax-exempt)
Return of Principal
- Reduce or eliminate estate taxes. Because a CRT is irrevocable, assets contributed to it may be removed from your estate for estate tax purposes.
- Potential gift tax consequences. Donors 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.
- Funding the CRT. A donor should work closely with a tax advisor, because some assets may not be appropriate for a CRT, or the CRT may need to be structured specifically to accommodate certain assets. Additionally, it is important for donors to remember that if they plan to fund the CRT with unproductive assets, the CRT can be structured to defer the income stream.
For donors seeking a current or future income stream, a CRT coupled with a donor-advised fund 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, with respect to both the income tax consequences of the gift and the administration of the CRT.
About the author:
Denise serves our most valued investment advisors and affluent clients as a primary point of contact for reviewing and accepting complex asset donations and onboarding large and sophisticated relationships. Prior to joining Schwab Charitable™, Denise served as a senior trust officer, providing estate and trust services for high-net-worth families in Wisconsin. She joined Charles Schwab & Co., Inc. as a High-Net-Worth Trust & Estate/Tax Specialist, a role in which she partnered with Financial Consultants to provide proactive estate, charitable giving, and tax-planning guidance to Schwab’s high-net-worth families. Denise holds a J.D. from Northern Illinois University of Law.