A charitable remainder trust (CRT) funded during the grantor’s lifetime can be a very effective financial planning took, providing the grantor valuable lifetime benefits.
Take the case of 72 year-old Phillip Philanthropist who has $1,000,000 of highly appreciated tech stock. Phillip has charitable inclinations, but is worried about the rising cost of health care. He feels he cannot afford to give away $1,000,000 during his lifetime as he may need to sell the stock in the future to meet nursing home expenses. However, Phillip plans to leave any stock remaining at his death to his favorite charities. While this plan is of enormous benefit to Phillip’s name charities, there is no financial benefit for Phillip during his lifetime.
Now take a look at what happens if Phillip gifts the stock to a CRT paying a 6 percent annuity payment each year. The immediate benefits to Phillip will be a substantial income tax deduction, increased income and diversification of risk with a deferral (or complete avoidance) of any capital gain tax.
The trustee will sell the low basis tech stock and build a diversified portfolio that can generate the necessary payout requirements while reducing the specific risk of having a largeconcentrated position in one stock. For the rest of Phillip’s life, the $1,000,000 of stock that previously paid no dividends will now provide an annual income of $60,000.00. As a further planning strategy, a portion of the distribution and the current income tax savings may be used to purchase life insurance to replace the gifted stock.
Phillip may structure his CRT as a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). The difference is in the method of calculating the income.
The CRAT will pay a fixed amount each year which may be expressed either as a fixed dollar amount or a percentage of the value of the assets on the date the trust is funded. The CRAT will protect Phillip in down markets. In contrast, the payout from a CRUT is variable and is expressed as a percentage of the trust assets, redetermined annually. This will allow Phillip to “enjoy” the trust’s appreciation.
Funding a CRT during the grantor’s lifetime maximizes the benefits to the grantor. In addition to the financial benefits, there is the intangible benefit of rewarding the grantor’s altruism. Many charities are happy to immediately “recognize” the donors who have named the charity as the beneficiary of a CRT.
This article only touches on the basics of this sophisticated concept and is not intended to provide legal advice. It is imperative that you consult with an attorney specializing in advanced estate planning as well as a knowledgeable financial planner, insurance agent or certified public accountant.