Is a Charitable Remainder Trust Right For You?

Many of my South Florida clients ask me if they should consider adding a charitable remainder trust (CRT) to their estate plan without actually understanding what it truly is and what it actually accomplishes. There are two types of charitable remainder trusts: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT).

A CRAT is a trust in which a fixed percentage or dollar payment is paid to the Grantor annuitant at least once a year. The annual payment must be no less than 5 percent and no more than 50 percent of the initial fair market value of the trust property. The payment may either be for the lifetime 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 gifts be made to the trust. Following the death of the annuitant, the remainder is transferred to the charity or is held in trust and distributed for the charity. A typical CRAT would, for example, pay a $5,000 annual payment to the Grantor from an initial one-time gift to the CRAT of $100,000.

A CRUT has the same requirements as the CRAT, except that the annual payment is a fixed percentage that must be reset each year upon 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 permits additional gifts to be made to the trust. A typical CRUT would pay 5 percent of the fair market value of the trust as determined on December 31 of the prior year, payable in 12 monthly installments. While 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 of the value of the trust assets.

Generally, for either 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 charity’s remainder interest is a deductible charitable contribution on the Grantor’s individual income tax return for the year in which the asset is transferred to the trust. Any unused deduction can be carried over for 5 years. If the CRT is established upon the death of the Grantor, it will generate an estate tax deduction for the remainder interest. Pairing the CRT with a large life insurance policy can result in a larger estate passing to the Grantor’s beneficiaries than would have been able without the CRT.

CRT’s can be very valuable estate planning and tax reducing tools, if implemented correctly. In order to determine if a CRT is right for your situation, you should set up 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 get the right plan in place for you. Estate plans are not cookie cutter molds and should not be drafted in a one-size-fits-all manner.