Charitable Remainder Trust

Lowering Estate Tax While Improving the World with a Charitable Remainder Trust

Charitable Remainder Trusts
A charitable remainder trust can lower your taxes, provide for a worthy cause, protect assets, and provide an annuity stream for a beneficiary. Pgiam / E+ / Getty Images

One great way to make the world a better place and lower your estate tax at the same time is to establish a charitable remainder trust. Created by Congress in 1969, a CRT, as it is commonly known, allows you to make an irrevocable gift of appreciated securities, cash, or other assets to a trust that you set up; the beneficiary of which is a recognized non-profit. For the remainder of your life, you (or a party you designate) will receive the investment income from the assets held in the trust.

Upon your death, the principal value of the assets becomes the property of the charity which you named.

The benefits of establishing a charitable remainder trust are manifold.  They include:

  1. No tax on appreciated property or securities: Because the gift is irrevocable once placed in the trust and the money is eventually destined for charity, you won’t pay any capital gains tax. If you owned 100,000 shares of Company XYZ with a $10 cost basis the stock is currently trading at $500 per share, the $49 million profit would go entirely to the charitable remainder trust if you placed the shares into the trust before selling them. This provides more assets generating investment income for you during your lifetime and more financial resources for the charity upon your death.​
  2. Flexibility to change charity designation: Although you can never cancel the charitable remainder trust, you are free to change the charity designated as your beneficiary. In other words, if you originally wanted the American Cancer Society to receive 100 percent of the trust principal upon your death, you could easily go back later and lower that figure to 50 percent while instructing the remaining half be left to The Trevor Project.
  1. Trust assets excluded from calculation of estate tax: The value of assets held in a charitable remainder trust is excluded from the calculation estate taxes, reducing your effective estate tax rate or possibly eliminating the liability altogether.
  2. Protection against the principal being spent: You may love the income beneficiary you name - let's say a spendthrift son or daughter who couldn't keep a dime in his or her pocket if the world depended on it - but recognize they're hopeless with money.  By keeping the money in the trust fund, the heir will never have the opportunity to deplete the principal, ensuring they don't accidentally derail your wish to better the world through the ultimate charitable donation.

    From time to time, misinformed or under-educated people who are not financially literate will criticize these structures as a give-away to the rich despite them existing as a way to encourage families to ultimately part with their wealth for the betterment of civilization, draining it away from bloodlines and putting it in the hands of orphanages, medical hospitals, research centers, colleges, universities, art museums, parks, operas, symphonies, and other worthwhile institutions or projects.  Back during the 2012 Presidential election, one of the candidates, Mitt Romney, was criticized for taking advantage of a charitable remainder trust despite the fact an informed observer should have wanted him to do so for the good of everyone rather than passing that money on to his children and grandchildren along with the other inheritance he is leaving them.  I discussed this, as well as provided a graphic overview of the process of settling a charitable remainder trust, on my personal blog.