Using a Charitable Remainder Trust
for “Double Duty”: Retirement and Estate Financial Strategies

A valuable estate strategy tool AND lifetime income for the beneficiary.

Charitable gift made during a person’s lifetime can serve as a valuable estate strategy technique that offers three important tax benefits:

1.    The Estate Tax Break - A lifetime charitable gift removes assets and future appreciation from the transferor’s estate.

2.    The Avoidance of Capital Gains - By giving away appreciated securities, the transferor avoids capital gains tax that would have been imposed if the donated assets had been sold.

3.    Current Income Tax Deduction – The fair market value of a charitable gift may qualify for a current income tax deduction in the year the gift is made.

A Charitable Remainder Trust (CRT) can be an attractive way to make lifetime gifts to a charity. In addition to the benefits listed above, it also can provide a fourth important benefit – a lifetime income for the individuals who are named as the income beneficiaries at the time of the trust’s creation.

How a CRT Works

A CRT is an irrevocable trust that names one or more qualified charities as beneficiaries. It is created by a grantor through the use of a trust document – and is often funded with appreciated assets, such as low-basis stocks.

Once stocks have been transferred to the trust, they may be sold by the trustee (i.e., the individual or entity that manages the trust) and the assets can be repositioned to increase income and diversification.

Since the trust is a tax-exempt entity, no capital gains tax is due on the sale of trust assets. The grantor (and/or any other designated income beneficiaries) receives an income from the trust during his or her lifetime. Upon the death of the last income beneficiary the remainder of money in the trust passes to the designated charity and the trust terminates.

Benefits for the Grantor/Beneficiaries 

Because the transfer is  irrevocable and the grantor gives up control of the trust assets, they are removed from the grantor’s taxable estate.

The trust generates a current income tax deduction for the grantor/donor in the year the gift is made, although adjusted gross income limitations on the charitable deduction should be considered as well. The trust provides lifetime income for one or two income beneficiaries.

The Grantor’s Four Decisions

The grantor of a CRT has four major decisions to make when setting up the trust:

1.    Trustee – The grantor must appoint a trustee – a person or institution who will be responsible for the CRT’s administration and asset preservation – and perhaps a successor trustee, who would serve as trustee in case the primary  trustee  can  no  longer  do so.

2.    Charity – The law requires that the trust remainder be transferred to one or more qualified charities appointed by the grantor upon the death of the last income beneficiary. However, this is not an irrevocable designation.

3.    Income Beneficiary or Beneficiaries –  The grantor must select an income beneficiary to receive income payments specified by the trust document for life

–    or over a specified number of years. The beneficiary may be the grantor, the grantor’s spouse, another person, or any two people. (If anyone other than the grantor and/or the grantor’s spouse is an income beneficiary, there may be gift tax consequences to the grantor for that beneficiary’s income interest.)

4.    Income Amount and Duration – An annual income payout to an income beneficiary is required and may be made over a single life, joint lives, or for a period certain of up to 20 years. In making this decision, the grantor should take into account the income beneficiary’s income tax status. While the CRT does not pay income tax, the income beneficiary is required to pay tax on trust distributions as they are received.

How the CRT Tax Deduction is Calculated

The current tax deduction allowed on contributions to a CRT is determined by IRS formula, which is based on the present value of the remainder projected to be left to the charity. The formula calculates the discounted value of projected annual income payments to income  beneficiaries  over  the   payout period. The total discounted value of these payments is subtracted from the fair market value of assets contributed, and the IRS allows a current tax deduction equal to the remainder. In general, the older the grantor is at the time the trust is established, the greater the current tax deduction will be as a portion of the total value contributed.

Trustee Choices in a CRT

Who can be the trustee of a CRT? Four choices are allowed: 1) a corporate trustee; 2) the charity; 3) an individual; or 4) the grantor.

The first choice usually is recommended by professionals because of the trustee’s numerous and complex responsibilities, such as:

►Each year, the trustee must file with the IRS a Split-Interest Trust Information Return (Form 5227) by April 15.

►The trust must obtain an appraisal of property contributed to the trust. Within 125 days after selling trust property (within three years of its contribution to the trust), the trustee must submit a signed copy of Form 8282 to the IRS.

►For non-cash charitable donations, the donor must complete IRS Form 8283. Ideally, this form should also be signed by the donee. In addition, the CRT trustee should also sign the donee acknowledgement section of IRS Form 8283.

Corporate trustees have the systems, staffs and objectivity to perform these complex tasks.

Who Can Take Advantage of CRTs?

CRTs can have the most advantages for those individuals who:

•    are age 50 or older;
•    have a strong desire to give their time and/or money to charity;
•    are in a fairly high federal tax bracket; and
•    would like to avoid ongoing investment management responsibility, while receiving a steady flow of retirement income that they can’t outlive.

Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.Offices in New York & New Jersey www.biondfinancial.com

Joseph Biondolillo is the founder of the Biondolillo  Financial Group where he works  with individuals, families and small business owners, helping them successfully plan for their financial future. He welcomes any questions or comments you may have regarding Irrevocable Life Insurance trusts or any other financial issues.