Financial Literacy

A charitable remainder trust (CRT) allows you to donate assets to charity but retain income from the assets. The income is payable to you (or your designated beneficiaries) for a specified term of years (or for the life or lives of specified individuals). Any property remaining in the trust at the end of the term is transferred to the charity. CRTs are generally created with at least $500,000 of assets.

The goals of this technique are to exclude the appreciating property from your gross estate and to create an income stream at a discounted value. The discount arises because the remainder interest in the trust is given to charity. The value of the remainder interest must be at least 10% of the fair market value of the transferred property in order to qualify as a CRT.

Many tax savings are gained through a charitable remainder trust (CRT). First, the donor is entitled to receive a charitable income tax deduction based on the value of the property the charity will eventually receive. Second, the donor removes these assets from his or her estate, so there can be an estate tax savings. Third, you can convert low-yielding assets into a consistent stream of income. Finally, if you transfer appreciated assets to the trust, the sale of this property by the trust has no immediate tax effect on you or the trust. Transferring appreciated assets to a CRT generally lowers your income taxes, avoids capital gains tax on an asset sale, and helps you accomplish your charitable goals.

An example of a charitable remainder trust

A person, age 75, transfers property to a CRT with a net fair market value of $1 million retaining a lifetime annuity of $50,000. Using IRS valuation tables, the remainder value is estimated to be $638,430. The donor would be entitled to a charitable income tax deduction of $638,430 (subject to the adjusted gross income limitations), and he or she would receive $50,000 per year for life. Upon the donor's death, the property would be excluded from his or her estate.