Lesson 53: Setting Up a Charitable Remainder Trust

Setting up a Charitable Remainder Trust (CRT) can be an effective strategy for managing estate taxes and supporting charitable organizations. This lesson will walk you through the essential steps to establish a CRT.

What is a Charitable Remainder Trust?

A Charitable Remainder Trust is an irrevocable trust that provides income to the donor or other beneficiaries for a specified period, after which the remaining assets are transferred to one or more charitable organizations.

Steps to Set Up a Charitable Remainder Trust

Determine the Type of CRT:
- Charitable Remainder Annuity Trust (CRAT)
- Charitable Remainder Unitrust (CRUT)
Select the Trust's Term: Choose between a fixed term (up to 20 years) or a term based on the life of one or more beneficiaries.
Choose the Payout Rate: The payout rate affects both the income beneficiaries will receive and the charitable deduction available. Typically, the rate ranges from 5% to 7% of the trust's assets.
Draft the Trust Document: Work with an attorney to draft the CRT document, ensuring compliance with IRS regulations.
Fund the Trust: Transfer assets into the trust. These can include cash, securities, real estate, or other valuable property.

Key Components of a CRT Document

The CRT document must include specific provisions to ensure it qualifies under IRS rules:

Trustee: The person or institution responsible for managing the trust.
Payout Terms: Defined payout terms for beneficiaries.
Charitable Beneficiary: The named charitable organizations to receive the remainder interest.

Payout Structure

The payout structure in a CRT can be visualized as follows:

graph LR A["Donor"] --> B["CRT"] B -->|Income for a Term| C["Beneficiaries"] B -->|"Remainder at End"| D["Charity"]

Tax Benefits

Setting up a CRT offers several tax benefits:

Immediate Charitable Deduction: Donors can take an immediate income tax deduction for the present value of the remainder interest that will go to charity.
Deferral of Capital Gains Tax: When appreciated assets are sold by the CRT, the trust pays no immediate capital gains tax.
Reduction in Estate Taxes: The value of the assets transferred to the CRT is removed from the donor's estate, potentially reducing estate taxes.

Example Calculation for Charitable Deduction

If a donor transfers $1,000,000 to a CRT with a 5% payout rate and a 20-year term, the present value of the charitable remainder interest can be calculated using IRS-prescribed tables and discount rates.

For example:

\[ \text{Charitable Deduction} = \text{Initial Contribution} \times \text{Present Value Factor} \]

Assuming the present value factor is 0.35, the charitable deduction would be:

\[ \$1,000,000 \times 0.35 = \$350,000 \]

Common Pitfalls to Avoid

Warning! Ensure compliance with IRS rules to avoid disqualification and potential penalties.

Improper Drafting: Ensure the trust document meets all legal requirements.
Incorrect Valuation: Properly value the assets transferred to the CRT to ensure accurate tax reporting.
Selection of Trustee: Choose a trustee with experience in managing CRTs to ensure proper administration.

Next Steps

Setting up a CRT requires careful planning and professional advice. For more information on related topics, visit our articles on Charitable Deductions and the Tax Benefits of Charitable Remainder Trusts.