Substantial numbers of affluent individuals and families want to use some of their wealth to support the causes and organizations they care about most. From helping those less fortunate to facilitating scientific breakthroughs, from providing safe habitats for wildlife to sharing the arts, philanthropy is a core value for many.

Just look at one affluent group “successful business owners” more than 70% of the successful business owners who told us they want to be seriously wealthy are tremendously charitably inclined. They see obtaining greater wealth as how they can do more to improve the world. They’re not the only ones seeking to have a strong charitable impact, of course. In working with the affluent for decades, we have consistently found philanthropy to be one of their most important goals.

Of course, the affluent also know the importance of smart philanthropy—how, by using the appropriate tools and strategies, they can have a much bigger impact than they otherwise could, while simultaneously enjoying benefits that can enhance their own financial security and flexibility. In this way, the affluent seek to—as the old saying goes— “do well by doing good.”

With that in mind, here’s a closer look at one philanthropic tool that many charitably minded people and families use: charitable remainder trusts.

The ABCs of a CRT

Charitable Remainder Trusts (CRTs) are popular due to their tax advantages, making them attractive for individuals with significant assets. Here are some key features:

  1. Income Stream: Assets placed in a CRT generate an annual income stream, which can be designated for yourself or other beneficiaries for life or a specified term.
  1. Tax-Deferred Growth: Assets in the CRT grow tax-deferred, with taxes incurred only on the income received from the trust.
  1. Charitable Impact: Upon the end of the designated term or the beneficiaries’ lives, remaining assets in the trust are directed to one or more chosen charities
  1. Tax Deduction: Funding a CRT provides an income tax deduction based on the actuarial value of the remainder destined for charity.
  1. Capital Gains Tax Avoidance: Appreciated assets gifted to a CRT bypass capital gains taxes, maximizing the amount available for philanthropy.

In summary, CRTs offer a strategic way to support charitable causes while providing tax benefits and income streams for beneficiaries, making them a powerful tool for philanthropic planning.

Two caveats

When considering Charitable Remainder Trusts (CRTs), it’s important to bear in mind the following points:

  1. Intent Matters: CRTs are irrevocable trusts, meaning assets transferred into them cannot be reclaimed. A genuine charitable intent is crucial; using a CRT solely for tax savings isn’t sufficient. If charitable intent is lacking, alternative tax-minimizing strategies that don’t involve irrevocable gifts may be more suitable.
  1. It’s not a piggy bank. At least 10% of the actuarial value of the CRT must go to charity. That’s why the payout schedule will be determined by actuarial calculations. A CRT that does not meet the 10% remainder requirement is not a qualified charitable remainder trust—and will lose its tax benefits.

In essence, while CRTs offer tax benefits and charitable opportunities, they necessitate genuine philanthropic intent and adherence to charitable requirements to maintain their tax-advantaged status.

Types of CRTs

The Charitable Remainder Trust (CRT) landscape consists of two primary types:

  1. Charitable Remainder Annuity Trust (CRAT): In a CRAT, the beneficiary receives a fixed dollar amount annually from the trust, which remains constant once established. Regardless of changes in the trust’s asset value, the beneficiary’s annual payout remains the same. Additionally, no new assets can be added to a CRAT after its initial setup and funding.
  2. Charitable Remainder Unitrust (CRUT): In contrast, a CRUT provides the beneficiary with a percentage of the trust’s current asset value annually. For example, if the specified percentage is 6%, the beneficiary receives 6% of the trust’s assets each year, recalculated annually. Unlike a CRAT, a CRUT allows for additional assets to be added to the trust over time.

What can you put in a CRT?

A Charitable Remainder Trust (CRT) can be funded with a diverse array of assets, including:

  • Cash
  • Stocks and bonds
  • Certain closely held stock types (e.g., limited liability corporations)
  • Partnership interests
  • Real estate
  • Artwork and collectibles

It’s advisable to ensure flexibility in the CRT, despite its irrevocable nature. This can include provisions allowing for the replacement of asset managers, among other terms, which can be customized and written into the trust document. This flexibility helps adapt to changing circumstances and optimize management strategies within the trust.

Final Thoughts

Charitable Remainder Trusts (CRTs) are valuable tools for philanthropic individuals with substantial assets, offering significant tax benefits and a reliable income stream while allowing for substantial charitable contributions. However, due to their complexities, it’s crucial to work with experts in charitable wealth planning to ensure proper setup and maintenance, avoiding potential pitfalls that could negate intended tax advantages.

ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2022 by AES Nation, LLC.

This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Homer Smith is an investment advisor representative of Konvergent Wealth Partners. Konvergent Wealth Partners and Homer Smith are not affiliated with AES Nation, LLC. AES Nation, LLC is the creator and publisher of the VFO Inner Circle Flash Report. Investment advice offered through Integrated Partners, doing business as Konvergent Wealth Partners, a registered investment advisor. Integrated Partners does not provide legal/tax/mortgage advice or services. Please consult your legal/tax advisor regarding your specific situation.