Practical Points About Charitable Remainder Trusts

The following list indicates some of the benefits and uses of charitable remainder trusts with plenty of technical details omitted. This is a complex topic with a multitude of variations on a common theme.

1. The regular payments from a CRT can continue after the donor's death, for the life of a spouse or other loved one.

2. The donated property and all future appreciation on it will not be included in the donor's estate.

3. All or part of the CRT income the donor receives (which is taxable), as well as the tax savings from the original deduction, can be used to buy life insurance on the donor to fund a "wealth replacement trust." That way the donor's children’s future inheritance will not be reduced, despite the donation to the charity. In these cases, everybody wins.

4. A CRT (or a pooled income fund) can be especially useful in dodging an income tax bullet on capital gains. If a donor owns property, especially rental property, that has increased considerably in value since acquisition, there will be income tax due on the gain if and when the property is sold. For property that has been held over decades, that potential gain—and tax—can be enormous, even at a rate of fifteen percent. However, if the property is donated to a charitable trust and the trustee then sells the property, there will be no tax on the sale—the law encourages charitable giving. This allows the entire amount placed in trust to be put to work earning an income stream for the donor.

5. CRTs can allow for a painless diversification of investments. A donor who has done well in a particular investment might recognize that he should not have all his eggs in one basket. But selling that asset for the purpose of spreading around the proceeds could subject his gain to a fifteen-percent capital-gains-tax hit. The CRT trustee, however, can sell and diversify appropriately but without losing a penny in tax.

From "AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy," by Michael T. Palermo, JD, CFP, 2005, pp. 194-195.