What is a Charitable Remainder Trust?

A Charitable Remainder Trust is an irrevocable trust in which a charitable tax-exempt organization is the remainder beneficiary of the trust after the settlor dies. By being irrevocable, that means that the person who creates the trust, cannot cancel the trust and the real estate cannot be transferred back out of the trust after it is transferred into the trust. An irrevocable trust creates a taxable event. A trustee is appointed and the owner of appreciated real estate transfers real estate to the CRT. The trustee sells the property tax free at the time of sale. The proceeds are invested in income earning and appreciating investments and the trustee pays a minimum of 5% of the gross assets each year to the person(s) who established the trust for his/her/their lifetime(s) or a term of years.

Sell Appreciated Real Estate Tax-Avoid Capital Gains Taxes

Get out of the landlord business and get on with your life. Enjoy the fruits of your labor and the appreciation in the value of your real estate investments. Title to the real estate will be held in the trust and when it is sold, no tax is due because the remainder beneficiary of the trust is a charitable tax-exempt organization.

As long as the trust income is more than the chosen payout percentage each year, then the capital gains taxes are bypassed. Some exceptions apply. The charitable organization receives what’s left over only after you pass away or after a term of years maximum 20 years - your choice when the trust is created.

Earn at least 5% income on the trust assets each year for life or term of years

The individual(s) who sets up the CRT and who owns the real estate (called a settlor or trustor) is the one who chooses the percentage of income he/she/they will receive from the trust assets each year. This is called the payout rate. The minimum payout rate is 5% and the maximum is 50%. The trust assets are revalued on January 1 of each each year and the rate that was chosen when the trust was established is the percentage payout that is used to calculate how much the settlor receives each year. Most settlors choose between 5% and 8% depending on their age and life expectancy. Let’s say a 90 year old would want a much higher payout rate and a younger individual would want a lower payout rate.

Trust Administration.

The CRT continues on and on and on for the life of the settlor or the term of years, maximum 20 years. The trustee appraises, calculates and pays out the percentage payout rate each year. The theory behind this type of trust is that the investments are going to increase in value over time, therefore the income is going to increase over time as well. That theory doesn’t always hold true, as we’ve seen from the great recession around 2008. Most of the investment lows from the 2008 era have regained their value and far exceeded it, thus make the CRT a very attractive planning strategy. But the ups and downs of the market can be quite scary for the settlor.

Choice of trustee. Most planners recommend that you choose a professional trustee such as a bank or trust company or a private professional fiduciary. They will have the business, accounting and business acumen to know how to administer the trust and keep the notices, reporting and accounting up to par and will know how to communicate with the settlor and the charity.

Team of advisors. A CRT really takes a team of advisors. The first stop is either with your estate planning attorney who recommends it or it could be your favorite charity with whom y ou’ve become acquainted with their planned giving officer. You’ve learned about the CRT and you are ready to take action to get out of the landlord business.

The estate planning attorney drafts the trust. Sometimes the charity, if they are the sole beneficiary and you have a reasonable payout rate, will pay for the drafting of the trust.

A qualified appraiser must prepare a qualified appraisal which qualifies for the IRS. Sometimes the charity will also pay for the appraisal if they are the sold beneficiary and you have a reasonable payout rate.

A CPA must give you tax advice about how any tax issues fit within your tax situation. The CPA explains to you about the four tier accounting/tax system and how the income from the trust is taxed to you. The CPA prepares tax returns for the CRT each year and sends you a K-1 for your returns.

A Realtor/Broker will be your professional to sell the real estate.

A financial advisor will be the one to take the proceeds and invest the money in safe and prudent, yet high yielding investments.

You’ll be working with your CPA and Financial Advisor on a continuous yearly basis and your estate planning attorney can help you if you want to reserve the right to change the charities as remainder beneficiaries and you want to opt to do that at a future time.