Charitable remainder trusts (CRTs) are a strategic estate planning tool, offering a dual benefit of supporting charitable causes while providing income to designate beneficiaries. When implemented effectively, CRTs can significantly reduce both income and estate taxes.

A charitable remainder trust distributes income to one or more non-charitable beneficiaries, such as the grantor (creator) or their family, over a set period of time or for the beneficiaries’ lives. Afterward, the residual assets of the trust are allocated to designated charitable entities. Upon creating the trust, the grantor is entitled to an immediate tax deduction, calculated based on the present value of the charitable remainder.

The establishment of a CRT allows the grantor to claim a charitable income tax deduction based on the estimated remainder value destined for charity. Moreover, placing assets in a CRT removes them from the grantor's estate, potentially lowering estate taxes, particularly for individuals with substantial assets.

Contributions to a CRT can include such assets as cash, publicly traded securities, real estate, and interests in closely held businesses. By placing appreciated assets into the trust, grantors can sidestep immediate capital gains taxes. As a tax-exempt entity, the CRT can sell these assets without triggering capital gains taxes, thereby preserving more capital for reinvestment and enhancing potential income.

There are two primary types of CRTs:

1. Charitable remainder annuity trust (CRAT) — This trust disburses a fixed annuity annually to the beneficiary. The annuity amount, set at the trust's inception, remains constant irrespective of the trust asset value fluctuations. CRATs are particularly appealing for those in need of stable, predictable income, such as retirees. However, once established, no further contributions can be made.

2. Charitable remainder unitrust (CRUT) — A CRUT pays a fixed percentage of the trust’s annually revalued assets, leading to variable annual payments that depend on the trust's investment performance. This structure allows for potential income growth over time and the flexibility to make additional contributions after the trust is established.

Navigating the complexities of CRTs requires careful planning and adherence to IRS regulations, which dictate specific payout percentages, charitable remainder values, and documentation requirements. A skilled trusts and estates attorney can assist in selecting the appropriate CRT type that aligns with personal financial and philanthropic goals, draft necessary legal documents and collaborate with financial advisors to maximize tax advantages.

Favaro, Lavezzo, Gill, Caretti & Heppell, PC in Vallejo advises clients on creating trusts to meet a wide range of needs. We help people with estate planning throughout Solano, Contra Costa and Napa counties. Call us at 707-674-6057 or contact us online to arrange a free initial consultation.