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We’re now well into the 25 Days of Giving Series and it’s my intent to provide different aspects and strategies of charitable giving. Given that it’s the season of joy, sharing, and love it’s a great time to be thinking about smart giving (the kind that doesn’t involve gift wrappings, stockings, or bows). Read on to learn how the charitable remainder trust could be a valuable giving tool. 

Charitable Remainder Trust, defined

A charitable remainder trust (CRT) is a split interest trust that pays out income to one or more non-charitable beneficiaries for life (or lives) or a term of years not to exceed twenty. The selected payout rate may not be less than 5%, and no more than 50%, of fair market value (FMV) of assets originally placed in trust. At the end of the trust term, the remaining trust assets (the remainder interest) is distributed to charity selected by the donor; the actuarial value of the charity’s remainder interest must be at least 10% at the time of the trust’s creation.

Benefits of a CRT

  1. Note that a useful attribute of a CRT is flexibility. Although Donor’s transfer of property to the trust is irrevocable, a CRT provides for Donor the right to change charitable beneficiaries.
  2. Note also the tax benefits of a CRT. Donor may receive a federal income tax charitable deduction for the value of the remainder interest in the year of the transfer, Donor may transfer assets without recognition of capital gain tax, and there is no estate tax on the property passing to Charity.

Two forms: CRAT and CRUT

CRTs take one of two forms: a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). There are important differences:

A CRAT pays an annuity to the income beneficiary at a selected payout rate that is a percentage of the assets valued at the time of the trust creation. Additional contributions to the trust are not permitted.

A CRUT pays a percentage of the annual value of the trust assets, a unitrust amount, to the income beneficiary. Additional contributions to the trust are permitted.

Variations of CRUTs

Several variations of the CRUT are permitted under the Internal Revenue Code:

  1. A Net-Income CRUT (NICRUT) permits the trustee to distribute an annual payment that is the lesser of the specified percentage of value in that year, or the net income actually earned by the trust in that year.
  2. A NIMCRUT is a CRUT with a net-income limitation subject to a make-up provision. Like a NICRUT, the terms of a NIMCRUT direct the Trustee to pay the lesser of the specified percentage of the value of the trust assets in that year or the net income actually earned by the trust in that year. However, if the payout is less than the specified percentage is paid out in one or more years, the accumulated “income deficits” will be made up in a subsequent year from the excess income above what is the specified percentage of the value of the trust assets in that year.
  3. A Flip CRUT permits the trust to begin its existence as a NICRUT or NIMCRUT, then “flip” into a standard CRUT on the occurrence of a specific triggering event, as provided in the trust document. The flip option is attractive when Donor wishes to donate to the CRUT illiquid or hard-to-market assets, such as real estate or closely held stock.

butterfly on finger

​Knowing if the CRT is a best choice for your charitable giving can be difficult, so I advise speaking with your trusted professional advisors to evaluate your situation. This concept can be confusing, so don’t hesitate to reach out for more information and explore how a charitable remainder trust could be beneficial to you. Feel free to contact me at any time at Gordon@gordonfischerlawfirm.com or by phone at 515-371-6077.

Top of the morning to you! On this happy St. Patrick’s Day, let’s discuss a great charitable giving tool that we are lucky to have—the Charitable Remainder Trust (CRT).

On this holiday, we see lots of depictions of green clover. Like most clovers, this series will come in three parts. Today, we’ll discuss the very basics of trusts. In Part Two (coming soon), we’ll discuss all the ins and outs of CRTs. Part Three will feature a simple but powerful case study to illustrate how beneficial—both to donors and donee charities—a Charitable Remainder Trust can be.

Why Are Charitable Remainder Trusts So Grand?

When it comes to the legal tool we call “trusts,” I can be said to be like Molly Bloom, the heroine in James Joyce’s Ulysses:

“[my] heart was going like mad and yes I said yes I will Yes.”

Why though? What is so great about trusts, anyway?

Trusts come in an almost limitless variety, but some of the key benefits include:

  • Saving taxes
  • Avoiding probate
  • Getting assets to your beneficiaries more quickly and easily
  • Maintaining privacy

Trusts also make challenges to your property more difficult. Since they can be so useful, let’s toast trusts with a pint of Guinness. Sláinte!

Sláinte Scottish Toast

Simplest Terms

In simplest terms, a trust is a legal agreement between three parties: grantor, trustee, and beneficiary. Let’s look at each of these three parties.

Grantor

All trusts have a grantor, sometimes called the “settler” or “trustor.” The grantor creates the trust, and also has legal authority to transfer property to the trust.

Trustee

The trustee can be any person or entity that can take title to property on behalf of a beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document, and must do so in the best interests of the beneficiary.

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (which is also true of grantor and trustee). Multiple trust beneficiaries can have different interests in the trust property. Also, trust beneficiaries don’t have to even exist at the time the trust is created.

Trust property

A trust can be either funded or unfunded. By funded, we mean that property has been placed “inside” the trust. This property is sometimes called the “principal,” “corpus,” or the “res.” By unfunded, we mean that no property has yet been placed inside the trust.

Any Asset

Any asset can be held by a trust. Trust property can be real estate, intangible property, personal property—a farm, building, vacation home, money, publicly traded stocks, closed corporation stocks, bonds, collections (such as say, shamrocks or Guinness mugs), business interests, personal possessions (such as an antique hard owned by Nana), vehicles, and so on.
Glasses of Guinness

“Imaginary Container”

Leprechauns, some may argue, are imaginary. Think of a trust as an “imaginary container.” We speak of putting assets “in” a trust, but assets don’t actually change location. It’s not a geographical place that protects, say, your car, but a form of ownership that holds it for your benefit. For example, on your car title, the owner blank would simply read “The Erin G. Bragh Trust.” It’s common to put real estate such as farms, homes, vacation homes and entire accounts like bank, credit union, and brokerage accounts into a trust.

After the trust is funded, the trust property will still be in the same place before the trust was created—your land where it always was, your car in the garage, your money in the bank, your stamp collection in the study, and so on. But the property will have a different owner: “The Erin G. Bragh Trust,” not Erin G. Bragh.

Transfer of Ownership

Putting property in trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has legal title to the trust property. For most purposes, the law treats trust property as if it were now owned by the trustee. For example, trusts have separate taxpayer identification numbers.

But, trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title, the right to benefit from trust property as specified in the trust.

Assets to Beneficiary

The grantor provides terms in a trust agreement as to how the fund’s assets are to be distributed to a beneficiary. The grantor can provide for the distribution of funds in any way that is not against the law or against public policy.

Almost Limitless Possibilities

The types of trust are almost as limitless as rainbows. Trusts can be classified by their purpose, duration, creation method, or by the nature of the trust property. Next time, let’s look at the specifics of a very helpful trust—the Charitable Remainder Trust. Until then, may the road rise up to meet you!