Understanding the Charitable Remainder Trust
The charitable remainder trust (CRT) is a popular retirement- and estate-planning tool. It can be a convenient way to create a stream of lifetime income for yourself and others or donate to a charity while minimizing and deferring taxes. But there are many choices to make when establishing a CRT and, in some cases, these tools may not be right for everyone.
What is a Charitable Remainder Trust and How Does it Work?
A charitable remainder trust is a type of “split interest” trust. It makes fixed payments to one or more income beneficiaries either for life or for a specified period of up to 20 years. Payments may be issued monthly, quarterly, semiannually, or annually. Upon the death of the income beneficiaries, or once the specified term has ended, whatever is left in the trust goes to one or more qualified U.S. charities. That remainder must be worth at least 10% of the initial value of the trust assets.
There are two types of CRTs:
- Charitable Remainder Annuity Trusts (CRATs) make payments in a fixed dollar amount (between 5% and 50% of the initial value of trust assets annually). You may not make additional contributions after the trust is established.
- Charitable Remainder Unitrusts (CRUTs) make payments based on a percentage of the current value of the trust assets (between 5% and 50% annually). You may continue to contribute to the trust after it’s established.
You establish a charitable remainder trust by donating assets. These can take various forms, such as cash, stocks, real estate, and private business interest. Once it’s funded, a trustee manages the trust.
Charitable remainder trusts are often established by a living donor who is also the income beneficiary, but they can also be established upon the donor’s death as a way to provide income for one or more heirs.
A charitable remainder trust is irrevocable, which means that once you place an asset in the trust, you can’t change your mind and take it out.
The Advantages of Charitable Remainder Trusts
Setting up a CRT can result in tax benefits. The assets you transfer to a CRT are partially tax-deductible based on the projected amount of the eventual charitable gift and other factors. Assets inside the trust enjoy tax-deferred growth. Appreciated assets donated to a CRT can be sold by the trust without incurring capital gains taxes. That said, payments to beneficiaries, are generally taxable.
A CRT can also simplify estate planning. As an irrevocable trust, the CRT is not considered part of the donor’s estate. That means, for example, the remainder of the trust transfers immediately to the charitable beneficiaries upon death without getting stuck in probate.
That said, charitable remainder trusts also come with some pitfalls. They can be complicated to set up and administer, and if you run afoul of certain requirements, you could retroactively lose a CRT’s tax benefits. For example, the charitable remainder must equal at least 10% of the value of the trust at the time it was established. If you wind up drawing too much in income and leaving too little to the trust’s charitable beneficiaries, your estate may owe additional income, gift, and estate taxes. Also, certain assets, such as S corporation stock and mortgaged real estate, are not allowed in a CRT. Their presence in the trust will disqualify it as a CRT.
We can help determine if a CRT is the right choice for you and how best to take advantage of their income, philanthropic, and tax-management benefits.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or to advise on the use or suitability of The AMG Managed Portfolio Series, or any of the underlying securities in isolation. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this article should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
Investing involves risk. Principal loss is possible. Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value(“NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance and may not protect against loss of investment principal.