Many of my South Florida clients ask me if they should consider adding a Charitable Remainder Trust (CRT) to their estate plan without really understanding what it really is and what it actually accomplishes. There are two types of charitable remainder trusts: a charitable remainder annuity trust (CRAT) and a charitable remainder trust (CRUT).
A CRAT is a trust in which a fixed percentage or dollar payment is paid to the beneficiary of the grantor’s annuity at least once a year. The annual payment must not be less than 5 percent and not more than 50 percent of the initial fair market value of the trust property. The payment can be for the life of the beneficiary or for a period of 20 years or less. The payment may not increase or decrease during the term of the trust, nor may additional donations be made to the trust. After the pensioner’s death, the remainder is transferred to charity or held in trust and distributed to charity. A typical CRAT, for example, would pay an annual payment of $5,000 to the Grantor from an initial one-time gift to the CRAT of $100,000.
A CRUT has the same requirements as a CRAT, except that the annual payment is a fixed percentage that must be readjusted each year with the revaluation of the trust property. The annual payment will increase or decrease, depending on the value of the trust assets. A limited exception to this rule is that the Grantor may take the lesser of the trust income or 5 percent of the trust assets. The CRUT also allows additional donations to be made to the trust. A typical CRUT would pay 5 percent of the trust’s fair market value as determined on December 31 of the prior year, payable in 12 monthly installments. Although the percentage would remain the same, the dollar amount received from the CRUT by the Grantor would change each year based on the increase or decrease in the value of the trust assets.
Generally, for any type of trust, the remainder must be at least 10 percent of the fair market value of the assets transferred to the trust. Both types of trusts provide income and estate tax benefits for the grantor. The value of the remaining charitable interest is a deductible charitable contribution on the grantor’s individual income tax return for the year the asset is transferred to the trust. Any unused deduction can be carried over for 5 years. If the CRT is constituted upon the death of the Grantor, it will generate a deduction from the equity tax for the remaining interest. Combining the CRT with a large life insurance policy can result in a larger estate passing to the grantor’s beneficiaries than would have been possible without the CRT.
CRTs can be very valuable tools for estate planning and tax reduction, if implemented correctly. To determine if a CRT is right for your situation, you should schedule a meeting with your South Florida estate planning attorney, your CPA, and your life insurance agent. These professionals, along with your financial advisor, will be able to assess your financial situation and put together the plan that’s right for you. Estate plans are not cookie cutters and should not be uniquely written.