Charitable Remainder Trusts: Leaving a Legacy

Charitable Remainder Trusts: Planning for Now and Leaving a Legacy

No question – planning for a time when you’re no longer around is hard. If you’re like most people, the most important thing is being able to continue to protect the people you love. And for many people who have made charitable gifting part of their mission, leaving a legacy ranks high as well. According to a recent survey, the top reasons for creating an estate plan are: 1) to provide for family financially (76.3%), 2) to streamline the inheritance process (65.5%), and 3) to leave a lasting legacy (36.8%).1charitable gifting

There’s an estate planning tool that can accomplish all three objectives—and also provide tax advantages. Charitable remainder trusts (CRTs) can help transfer appreciated assets in a tax-efficient way with the ability to provide for a charitable cause.

The Structure and the Advantages

A CRT is a tax-exempt trust that allows you to donate to the charity of your choice, while provisioning for a noncharitable beneficiary, such as the creator of the trust or any named individual or group.

Federal estate taxes can be avoided with CRTs because the appreciated property is removed from the estate. Because it is donated to a tax-exempt charity, the sale of the assets is not subject to capital gains taxes. For assets that have appreciated substantially, this can be a way to monetize the asset to the maximum extent and then create an income stream with the proceeds, leaving behind the remainder to fund a legacy for the charity.

It is important to remember that CRTs are irrevocable, meaning that once tax relief is granted for the sale of an asset, the relief can’t be revoked. The asset is also protected from claims by creditors since the asset is no longer in the donor’s books.

Two Options for Creating an Income Stream

Once a CRT is created, the property is transferred to the trust and its value is determined. The annual income stream paid out to the beneficiary of the trust can be either a fixed percentage of the value or a fixed dollar amount.

  1. A Charitable Remainder Unitrust (CRUT), calculates the annual payment as a fixed percentage of the initial value of the assets in the trust. The trust is revalued annually, and the payout is recalculated based on the value of the principal assets. The percentage remains the same, but the amount of the annual payout can move up or down, tied to increases or decreases in the value of the principal assets. This means the amount of the income stream is variable.
  2. A Charitable Remainder Annuity Trust (CRAT) also provides an annual payment to the beneficiary, but it’s a fixed dollar amount, based on the initial fair market value of the assets in the trust. This amount remains the same regardless of subsequent valuations.

Remember, in both the CRAT and CRUT, the IRS dictates that distributions to an appointed beneficiary be no less than 5% and no more than 50% annually. Furthermore, the charitable organization must receive at least 10% of the initial donation you made to the trust.

The terms of termination of the trust are determined by the trust document, and the remainder of the trust’s assets are then transferred to charity.

The Bottom Line

As with most estate planning tools, there is a level of complexity. When it comes to passing down wealth, it’s important to ensure assets are properly transferred and that your goals will be taken into account.

 

  1. Suh, Elissa. Survey: Nearly 40% Of People Feel Increasing Urgency To Get A Will Because Of COVID-19. PolicyGenius. December 2, 2020.

 

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The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation.

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An enduring message to begin the New Year

During the holiday season I had the wonderful experience of accompanying my young granddaughter on a visit to Milwaukee’s historic Pabst Mansion.  The home of beer baron Captain and Mrs. Frederick Pabst is always decked out for the season and provides a small glimpse into how those other generations celebrated the holidays and family.

Milwaukee's historic Pabst Mansion
Milwaukee’s historic Pabst Mansion

The mansion rooms are filled with Christmas trees and other festive decorations but the most moving item for me personally was the letter that Captain Pabst left for his children as the end of his life neared.  The original letter, written in the Captain’s own scrawling hand, is on display in his study which also features the family values intricately carved into the room’s heavy wood beams.  The letter has been replicated to make it easier for visitors to read, and the message is moving and poignant.  In it’s simplicity, it captures the life legacy Captain Pabst wanted to share with his children–a personal reminder of the family values and of his final wishes for them.

As we begin a new year, let’s all remember the things that are most important in our lives and the personal legacy we wish to leave behind.

Here’s a copy of Captain Pabst’s letter to his children, courtesy of the Pabst Mansion.

Captain Pabst’s legacy letter