Definition
The term charitable remainder trust refers to an irrevocable trust that provides income to a beneficiary and assets to a charitable organization. Charitable remainder trusts are frequently funded with highly-appreciated assets.
Explanation
Also referred to as a CRT, charitable remainder trusts are oftentimes established by a donor / grantor that has highly-appreciated assets. This irrevocable trust provides the beneficiary with a long-term source of income, while allowing the donor / grantor to also provide a significant monetary gift to a charitable organization.
The main features of a CRT include:
Named Beneficiary: receives either a fixed amount of income each year from the trust or a percentage of its value. The duration of this income stream will last the shorter of the beneficiary's lifetime or twenty years.
Charitable Organization(s): once benefits stop flowing to the named beneficiary, all of the remaining assets, and the income generated by those assets, are owned by one or more charitable organizations.
CRTs offer the donor / grantor several advantages, including:
Elimination of capital gain taxes on highly-appreciated assets.
The potential for an immediate tax deduction.
A steady source of income for life or twenty years.
Flexibility with respect to the types of assets placed in the trust.
Avoiding estate taxes, since the donated assets are removed from the grantor's estate.
Allows the donor to make a gift to a favorite charity.
Oftentimes the trustee will immediately sell the trust's assets, investing the proceeds into income-producing assets. Since the grantor no longer owns the assets, they avoid paying capital gains on their appreciated value. This mechanism provides a tax-efficient way for the donor to convert highly-appreciated, non-income producing assets into income-producing assets.
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