Charitable Remainder Trusts May Provide Benefits

We’ve attached a worthy article about Charitable Remainder Trusts “CRT”). These are important vehicles that can help client’s accomplish life planning goals (like reduced taxes and enhanced retirement income planning) while at the same time benefiting their favorite charity or group of charities. It is one piece of a bigger puzzle that could fit into your own estate plan – depending on your overall goals and objectives.

Many people don’t understand CRT’s. Hopefully, this will help bridge that gap.

CRTs may provide benefits
Times Herald Record
by Laura Medigovich

Charitable remainder trusts are gifting vehicles that provide for two sets of beneficiaries, a current income beneficiary and a remainder beneficiary.

CRTs can also provide the donor with substantial income tax savings and estate tax savings as well. In a nutshell, the donor donates an asset to a charity through a trust. The charity sells the assets and invests the proceeds. The income beneficiary receives an income stream for a term, not to exceed 20 years. At the end of the term, the remaining proceeds belong to the charity.

For illustration purposes, let's assume you are 50 years old, and you have $1 million worth of ABC stock. You purchased the stock 30 years ago for $200,000. So you have a low cost basis (the amount you paid for the stock) of $200,000. If you sold ABC stock for $1 million you would have to pay capital gains tax on $800,000 ($1 million minus $200,000 minus your cost basis equals $800,000). The federal tax bite alone would be $120,000 ($800,000 x 15 percent = $120,000).

Provides income stream

Instead, you can create an irrevocable charitable remainder trust and donate the ABC stock to "favorite" charity through the trust. The trust sells ABC stock on behalf of "favorite" charity and invests the $1 million of proceeds at a 6 percent rate of return. For the next 10 years, you receive an income stream of $50,000 a year as the income beneficiary. At the end of 10 years, "favorite" charity receives the remaining principal assets from the trust, approximately $582,065.

The above example illustrates the many benefits the donor and charity receive through a charitable remainder trust. First, our donor would receive a federal income tax deduction based on the $582,065 (the remainder amount) the charity would receive at the end of the 10-year term. Second, by gifting $1 million worth of assets, the donor has reduced his or her taxable estate, therefore creating estate tax savings. Third, the donor has also created a stream of income for himself or herself. Of course the donor has also provided the charity with a sizable donation, which is good for everyone involved.

One of the major disadvantages with a CRT is that it is irrevocable. Which means once you have donated the asset, you have lost all claims to it. So you should be confident that you have enough other assets to live comfortably, before you make the donation.

This has been a simplified discussion regarding charitable remainder trusts. When it comes to CRTs, there are several variations on the theme, such as CRATs, CRUTs and NIM-CRUTs. Each has its own nuances. As with any estate planning strategy, it is important to consult with your attorney and tax adviser to determine which is best for you and your family.

Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region.