Charitable remainder trusts (CRTs) can create wonderful opportunities for charities, while providing significant benefits to donors and their families. In addition to allowing donors the opportunity to have a substantial impact on a cause they care about, CRTs provide the ability to positively impact an investment portfolio and cash flow while reducing taxes. In fact, with recent tax law changes, a CRT can be used to stretch out the tax deferral of retirement accounts for heirs.

A key differentiator in CCM’s approach to wealth management is the emphasis we place on integration. Not only do we manage our clients’ assets from an investment perspective, we also provide in-depth analysis and advice for their retirement cash flow, long-term tax planning, risk management, estate, and philanthropic needs. With retirement comes new possibilities and decisions about how to deploy the financial assets accumulated to best meet personal, financial, and philanthropic goals for the balance of one's life. A few years prior to retirement is the point in many of our clients’ lives that we begin to discuss whether a charitable remainder trust is a sound strategy for their goals.

What is a Charitable Remainder Trust? 

A charitable remainder trust (CRT) is created by making an irrevocable gift to a trust. Over a period of time, the trust will distribute income to a beneficiary, typically the person who made the gift to the trust. At the end of the trust term, the remaining assets are distributed to a charity. 

To achieve cash flow, tax, and diversification solutions, the CRT should be thoughtfully designed with the input of your financial advisor, accountant, and attorney. Some terms that require consideration: 

  • Determining which assets are appropriate;
  • The length of term for the income to be distributed to the income beneficiary; and  
  • Amount you intend for charity at the term. 

Sometimes, it’s beneficial to examine a situation where a CRT has yielded win-win benefits. Meet Lauren.

A Case Study: Lauren

Lauren took advantage of an employee stock-purchase plan early in her career. She is recently retired with a large severance package from her company. She has a $3 million portfolio, $1 million of which is in company stock with a basis of $200,000. She needs to use her portfolio for income while she is living. At the end of her life, she plans to give some of her assets to charity. 

Lauren creates a CRT to provide income for the rest of her lifetime, known specifically as a charitable remainder unitrust. When Lauren transfers the stock position to the trust, her advisor sells the position and reinvests the asset into a diversified portfolio of 60% stocks and 40% bonds. Every three months, Lauren receives a distribution from the trust. The diversified portfolio is less risky than the single stock, so when the CEO abruptly leaves the company next year, Lauren’s quarterly distributions aren’t affected.  

When Lauren files her tax return each year, she will pay tax on a portion of the capital gains tax from the sale of the company, based on the amount of income that she received. Outside of the trust, Lauren will pay tax on an $800,000 capital gain when the stock was sold. Inside the trust, the tax liability on the $800,000 capital gain is spread throughout the lifetime term of her trust.  

In the year the stock is transferred to the CRT, Lauren also receives a charitable deduction based on the present value of the future charitable gift. This helps offset the ordinary income tax due on the sizable severance she received.  

At the end of her life, the balance of the trust will be transferred to her charity of choice. If Lauren’s charitable passions change throughout her life, the charitable remainder can be transferred to her donor advised fund. Through the donor advised fund, Lauren can easily alter her charitable beneficiaries. She may ultimately decide that half will go to her local food shelter and half will stay in the donor advised fund to make annual gifts directed by her sons.  

When designing the trust with her advisors, they determined a year-over-year taxable income stream fits with Lauren’s tax-bracket management strategy, while also maximizing the charitable deduction in year one. The CRT was specifically designed for Lauren’s lifetime need, the charitable organizations she loves, and includes her sons in her charitable bequest.   

Who is well suited to consider a CRT as part of their financial plan, and at what point in their life might this be advantageous?   

A CRT involves multiple facets of CCM’s integrated approach and suits different people for different reasons. For example, a prospective retiree may consider a CRT if their asset make-up and retirement plan is comprised of some or all of the following factors to varying degrees: 

  • They’re charitably inclined and would like to incorporate philanthropy into their legacy planning;
  • They’ve accumulated a concentration of appreciated stock holdings that creates undue market risk for their portfolio, and it is in their best interest to immediately diversify;
  • An analysis of their cash flow planning reflects that they need to retain and utilize the value of those holdings to help fund their cash flow needs in retirement;
  • They would benefit from the ability to spread out the tax consequences of unwinding their appreciated positions over a period of time; and 
  • An upfront tax deduction for the trust’s remainder that will go to a charity at the end of the trust term would be advantageous in their current year tax situation.

Why would I consider using a CRT to achieve my philanthropic goals rather than other charitable tools that are available? 

While a CRT is not for everybody, it offers a few unique characteristics that may be more conducive to meeting both your philanthropic and retirement goals than other charitable giving options that exist. 

A key benefit of creating a CRT is the ability to direct the stream of income from the trust each year to a beneficiary to support their cash flow needs over the trust term. The trust term can either be a specified length of time or a lifetime. From a tax perspective, the income that is distributed to the beneficiary each year will be reported on their tax return.   

In general, this annual income is comprised of investment income earned on the trust’s assets as well as a portion of the undistributed capital gains from the initial divestiture of the original assets contributed to the trust. Over time, this structure results in long-term tax deferral of the gain realized when the appreciated stock position was unwound, yielding a positive tax result for the income beneficiary.   

The tax deferral aspect may even be appealing for a prospective client who isn’t necessarily strongly charitably inclined, but desires to retain an income stream from certain appreciated assets and defer the tax bill generated on disposition of those assets over a specified term. In fact, a CRT can be designed to have a larger or smaller income stream over its term and a smaller or larger ending projected charitable remainder depending on the preferences and goals of the grantor. 

Exploring if a CRT is Right for You

A CRT provides donors with a remarkable opportunity to care for themselves and their loved ones and experience the joy of giving. As a complex planning tool, a CRT has significant flexibility for grantors who are comfortable with the irrevocable nature of the trust. However, there are nuances that should not be overlooked to ensure that the short-term and long-term tax and financial planning consequences are appropriate for your situation. The integrated wealth management team at CCM is happy to discuss whether a charitable remainder trust is right for you. Please contact us.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.