You might have several goals you'd like your estate plan to achieve. They may include giving to your favorite charity and leaving a significant amount to your loved ones under favorable tax terms. One estate planning technique that may allow you to accomplish both goals is the use of a charitable remainder trust (CRT).
Typically, you set up one of two types of CRTs and fund it with assets such as cash and securities. The trust then pays out income to a designated beneficiary or beneficiaries — perhaps yourself or your spouse — for life or a term of 20 years or less. If it suits your needs, you may postpone taking income distributions until a later date. In the meantime, the assets in the CRT continue to grow.
When using a CRT, you may be eligible for a current tax deduction based on several factors. They include the value of the assets at the time of the transfer, the ages of the income beneficiaries and the government's Section 7520 rate. The resulting tax deduction may be anywhere from $10,000 to hundreds of thousands of dollars. As a general rule, the greater the payout to you (and consequently, the lower the calculated amount that ultimately goes to charity), the lower the deduction.
Because provisions under the Tax Cuts and Jobs Act limit certain itemized deductions and increase the standard deduction through 2025, consider transferring assets in a year in which you expect to itemize. Further, the deduction for appreciated assets is generally limited to 30% of your adjusted gross income (AGI). However, if the 30%-of-AGI limit applies, you can carry forward any excess for up to five years.
There are two types of CRTs, each with pros and cons:
Either type of CRT may be coordinated with other estate planning techniques. For example, a CRAT or CRUT often is supplemented by another trust or a life insurance policy to even things out for family members when the remainder goes to charity.
When you set up a CRT, you must appoint the trustee who'll manage its assets. This should be someone with the requisite financial knowledge and a familiarity with your personal situation. Thus, it could be a professional or an entity, a family member, or a close friend.
Because of the potentially significant dollars at stake, many trust creators opt for a professional who specializes in managing trust assets. If you're leaning in this direction, interview several candidates and choose the best one for your situation, considering factors such as experience, investment performance and the level of services provided.
Know that a trustee is obligated to adhere to the terms of the trust and follow your instructions.
Thus, you still maintain some measure of control if someone else is handling these duties. For example, you may retain the right to change the trustee if you become dissatisfied or designate a different charity to receive the remainder assets.
You may be able to take advantage of a one-time opportunity to use a qualified charitable distribution (QCD) to fund your trust. Normally, as long as you're older than age 70 ½, you can transfer up to $105,000 (in 2024) annually from an IRA to qualified charities. QCDs aren't taxable or tax-deductible but count as required minimum distributions.
The new option is to transfer a split-interest gift of up to $53,000 (in 2024) to a CRAT, CRUT or charitable gift annuity. This amount is subtracted from your $105,000 annual QCD limit. However, there are restrictions, and split-interest gifts aren't for everyone.
Keep in mind that CRTs are irrevocable, meaning once you execute one, you can't undo it. So be sure to discuss your options thoroughly with your estate planning advisor first.
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