The question of whether a charitable remainder trust (CRT) can be established for a set term of years rather than for the life of a beneficiary is a common one, and the answer is yes, absolutely. While many people associate CRTs with lifetime income streams for beneficiaries, the IRS allows for both lifetime and term CRTs. This flexibility makes CRTs a versatile estate planning tool, adaptable to various financial goals and circumstances. Roughly 65% of CRTs established are for the lifetime of one or more beneficiaries, leaving around 35% designated as term trusts with a specific duration. Understanding the distinctions between these two types is crucial when considering a CRT.
What’s the difference between a lifetime and a term CRT?
A lifetime CRT, as the name suggests, pays income to the beneficiary for their lifetime. The remaining assets then go to the designated charity. A term CRT, however, is established for a specific period, such as 10, 20, or even 30 years. At the end of the term, the remaining assets are distributed to the charity. The primary difference lies in the duration of the income stream and the certainty of the trust’s end date. This distinction influences the tax benefits and suitability for different financial situations. “The beauty of a term CRT is the predictability, knowing exactly when the charitable portion will be distributed,” says Ted Cook, a San Diego trust attorney specializing in charitable giving strategies.
How does a term CRT affect the charitable deduction?
The charitable deduction for a CRT is based on a calculation that considers the present value of the remainder interest that will eventually go to the charity. With a lifetime CRT, this calculation relies on the beneficiary’s life expectancy. For a term CRT, the calculation uses the specified term length. Generally, a term CRT will result in a smaller charitable deduction than a lifetime CRT with the same income stream, because the charity receives the assets sooner, reducing the present value of the remainder interest. However, the donor benefits from knowing exactly when the trust will terminate and can plan accordingly. It’s important to remember that the IRS sets guidelines for the allowable deduction amount, and a qualified appraisal may be necessary.
What are the tax implications of a term CRT?
A CRT offers several tax advantages. First, the donor receives an immediate income tax deduction for the present value of the remainder interest passing to charity. Second, the income received from the trust may be partially tax-free, depending on the trust’s structure and the type of assets transferred. Finally, any capital gains on appreciated assets transferred to the trust are avoided because the trust sells the assets without triggering a taxable event. With a term CRT, the timing of these tax implications is predictable, aligning with the trust’s fixed duration. It’s crucial to work with a qualified tax advisor to understand the specific tax implications based on your individual circumstances.
Can I change a lifetime CRT to a term CRT?
Unfortunately, you cannot simply change a lifetime CRT to a term CRT after it’s been established. The terms of the trust are irrevocable, meaning they cannot be altered. Attempting to do so could jeopardize the trust’s tax-exempt status and result in unexpected tax consequences. However, it may be possible to terminate the existing lifetime CRT and establish a new term CRT with the remaining assets, but this would require careful planning and could trigger a taxable event. It’s always best to consult with a trust attorney and tax advisor before making any changes to your estate plan.
What assets are best suited for a term CRT?
A variety of assets can be used to fund a CRT, including cash, stocks, bonds, and real estate. However, assets that have appreciated significantly in value are particularly well-suited for CRTs, as they allow the donor to avoid capital gains taxes and receive a charitable deduction. Appreciated real estate, for instance, can be transferred to the trust, sold by the trustee without triggering a taxable event, and the proceeds invested to generate income for the beneficiary. This can be especially beneficial for individuals who own highly appreciated assets that they are reluctant to sell directly. “We often advise clients to consider CRTs when they have assets with substantial unrealized gains,” explains Ted Cook. “It’s a way to achieve both charitable goals and tax efficiency.”
I once helped a client, Sarah, who was determined to establish a charitable remainder trust, but was hesitant about the lifetime aspect.
Sarah, a successful entrepreneur, had amassed a substantial portfolio of stock. She wanted to make a significant donation to her alma mater but also wanted to ensure a comfortable income stream for her daughter for a set period, while her daughter finished graduate school. We discussed the options, and she ultimately opted for a 15-year term CRT. This allowed her to avoid capital gains taxes on the stock, receive an immediate income tax deduction, and provide her daughter with a predictable income stream for the duration of her studies. What I observed was the benefit of having a fixed end date to her charitable giving goals.
But I also recall another client, Mr. Evans, who initially set up a lifetime CRT and later regretted it.
Mr. Evans, a retired physician, had transferred a substantial amount of stock to a lifetime CRT, intending to provide income for his wife. Unfortunately, his wife passed away unexpectedly after only a few years, leaving a significant portion of the trust assets to remain invested for many more years. This meant that the charitable remainder wasn’t distributed as he had originally anticipated, and he felt a sense of frustration and lost control. Had he opted for a term CRT with a predetermined duration, he would have had a more predictable outcome. This scenario underscored the importance of careful planning and considering all potential contingencies when establishing a CRT.
What happens to the remaining assets at the end of a term CRT?
At the end of the specified term, the remaining assets in the trust are distributed to the designated charity. The charity can then use these funds for its general purposes or for a specific program or initiative, as outlined in the trust agreement. It’s important to choose a charity that aligns with your values and that is capable of effectively utilizing the funds. A well-structured term CRT provides a powerful way to support a cause you care about while also achieving your financial and tax planning goals. “We always encourage clients to thoroughly research the charities they are considering and to ensure they are reputable and financially sound,” adds Ted Cook. “A lasting charitable impact requires careful selection and oversight.”
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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