A significant benefit of Charitable Remainder Trusts is that they allow the opportunity for donors to know they will be giving financial support to a favored charity in the future. Charitable Remainder Trusts are commonly used for the purpose of planned giving within a thoughtful and holistic financial plan.
Alliance administers many different kinds of Charitable Remainder Trusts. Learn more about how they are taxed differently than other types of trusts in this article.
Charitable Remainder Trust?
A Charitable Remainder Trust (CRT) is a trust where a grantor contributes assets to an irrevocable trust and that trust provides payments to an income beneficiary—often either the grantor or their spouse—for a period not to exceed 20 years.
Any remaining assets would pass to one or more charitable beneficiaries, such as a family foundation or public or private charity.
These are used in years where the grantor:
- Needs additional income
- Has low income-producing but highly appreciated assets
- Has a high adjusted gross income
- Could benefit from a charitable deduction
- Wants to support a favorite charity in the future
The ability to transfer highly appreciated assets to the trust and have the trust sell the assets with no capital gains immediately due and payable is one significant tax benefit of a Charitable Remainder Trust.
How Does the Income Tax Deduction Work?
The grantor receives a charitable deduction equal to the present value of the remainder interest, calculated to contribute to the charity when the Charitable Remainder Trust ends.
The current value of the remainder interest is calculated based on the trust term, the payout rate, the IRC section § 7520 rate, and must pass two tests:
- Remainder test: The charity should anticipate receiving at least 10% of the original fair market value of the trust; and
- Probability test (specific to CRATs): There must be a greater than 5% probability there will be enough assets to last until the end of the trust term
Gifts where the charitable remainder is given to a public charity:
The grantor will be entitled to receive an income tax deduction of up to 60% of the grantor’s adjusted gross income (AGI) for gifts of cash and up to 30% for gifts of securities.
Gifts where the charitable remainder is given to a private charity or family foundation:
The grantor is entitled to a charitable deduction of up to 30% of their AGI for cash gifts and 20% for gifts of securities.
Deduction carries forward:
The remaining deductions may be carried forward for up to an additional five years if the grantor cannot use all of the charitable deductions within the first year.
How are Charitable Remainder Trusts Taxed?
The income beneficiary of a Charitable Remainder Trust does not receive the distributions tax-free; distributions from the Charitable Remainder Trust to a beneficiary are taxed in the following order:
- Ordinary income: For the payout period, followed by any unpaid ordinary income from prior years
- Capital gains: For the payout period, followed by any unrealized capital gain income from prior years
- Distributions to the income beneficiary are characterized as long-term capital gains due to the charitable remainder trust recognition of long-term capital gain on the sale of donated assets
- Tax-free income: The income beneficiary will not be entitled to tax-free income until all embedded capital gains are paid out to the income beneficiary
- Return of principal: Return of capital originally invested
Estate and Gift Taxation of Charitable Trusts
Where the sole income beneficiary is the grantor:
At the grantor’s death, the value of the Charitable Remainder Trust is included in the grantor’s estate. The estate will receive a charitable estate deduction equal to 100% of the value of the trust.
Where there are joint income beneficiaries (spouses):
Upon the grantor’s death, the value of the Charitable Remainder Trust will be included in the grantor’s estate, but the estate will receive a marital deduction equal to 100% of the value of the trust.
Where the income beneficiary changes upon the death of the grantor:
The present value of the remainder interest going to charity is recalculated by subtracting the present value of the remainder interest from the fair market value of the Charitable Remainder Trust on the death of the original grantor. The difference is then included in the grantor’s estate for estate tax purposes.
Where the named income beneficiary is a non-spouse, upon funding the trust:
The present value of the remainder interest is subtracted from the value of the Charitable Remainder Trust. The difference will be considered a taxable gift by the grantor to the non-spousal beneficiary for gift tax purposes. A gift tax return will need to be filed for the gift.
Charitable Remainder Trusts with Alliance Trust Company
Alliance Trust Company of Nevada works with individuals across the globe to help them manage their Charitable Remainder Trusts. We value each of our clients and support their charitable and philanthropic inclinations.
Alliance is based in Reno, Nevada, with representatives in multiple states and countries. With some of the most favorable trust laws in the United States, Nevada leads the nation in both domestic and global asset protection and wealth management.
This article is informational only and is not to be taken as legal or tax advice. Each individual’s legal and tax situation is unique and should be reviewed by licensed professionals. Laws and regulations are subject to change and Alliance cannot be held responsible for reliance on the information contained herein.