Charitable Remainder Trusts
are found in the IRS Code in Section 664 and allow a donor to gift
to an IRS-recognized charitable entity, through a trust, an highly
appreciated asset. The Trustee of the ILIT sells the gifted asset,
free of any capital gains taxes, and invests the sales proceeds.
The Trustee then pays an income stream to the designated income
beneficiary of the CRT. The donor also receives an income tax deduction
for a per centage of the gift and the gift is heavily discounted
for estate tax purposes. If the income beneficiary is the donor
(or their spouse) a discounted value (at least 10% of the value
of the gift) remains with their Net Taxable Estate because of the
reversionary income interest. If the income beneficiary is another
person, such as a child, then there is no reversionary estate tax
issue, but the same amount is seen as an amount necessitating the
reporting of a gift tax (the $10,000 exclusionary rule does not
income stream is for either (1) 20 years, or (2) life. If the 20
year income option is chosen the income stream will continue to
the income beneficiary for 20 years. If they die during that period
of time, the income continues to their estate until the advent of
the 21st year. If the life option is chosen the income continues
as long as the income beneficiary lives. In either case, the income
is taxable as ordinary income.
are two kinds of CRTs. The first is the Annuity Trust (CRAT) which
pays a set percentage of the initial gift for the income period.
The other is the Uni-Trust (CRUT) which pays a set percentage of
the value of the principal calculated each year. IRS tables determine
the maximum allowable income in both cases. By law the CRT must
pay at least 5% per year. If the investment does not earn a full
5%, then the shortfall must be paid from trust principal. Few people
use CRATs anymore. A CRUT can pay an increasing income each year
if the investment is wisely made. In addition, a CRUT, unlike a
CRAT, can receive future dditional gifts.
are minimum ages for income beneficiaries. In addition, the complex
math formula must be adjusted each month according to the Average
Federal Midterm Rate to calculate the size of the income stream.
The size of the income stream is largely determined by the age of
the income beneficiary. The younger they are the lower the income
frequently gifted to a CRT are appreciated real estate, stocks and
bonds. The gift asset must be transferred to the ownership of the
CRT prior to its sale. Some assets may be taxed prior to this. This
includes U.S. savings bonds and annuities. This may also include
property which has enjoyed "double depreciation" allowances.
In some cases the income tax deduction allowed for the CRUT may
be sufficient to "wash" the income tax due on the conversion
of these assets.
are valuable estate planning tools with a wise use:
They can be used to convert hgihly appreciated (and taxable) assets
into a retirement income stream.
can dramatically reduce the Net Taxable Estate's size and thus
lower estate taxes. The heirs may not inherit a specific asset,
but they could receive a lifetime income stream in its place.
can be used in a divorce to provide child support payments.
in every case, they can greatly benefit a charity(ies) of the donor's
choice. The Trustee must be a disinterested third party at arm's
length and they must give the donor and income beneficiary(ies)
an annual accounting.
to an ILIT, the CRT must be registered with the IRS. The Trustee
must sumbit a completed SS-4 form and Form 56 along with a copy
of the trust instrument. If this is not done then the arrangement
will not be recognized. In addition, the charitable entity(ies)
must be those which are IRS-recognized as well.