6 minute read
Key Takeaways:
- A charitable remainder trust (CRT) is a powerful tax and estate planning tool for clients with highly appreciated assets
- CRTs can help eliminate capital gains tax, provide lifetime income, reduce estate size, and support charitable giving
- Advisors can use CRTs to differentiate their practice, especially when working with high-net-worth individuals and legacy-focused clients
- There are various CRT structures: CRUT, CRAT, NIMCRUT, and Flip CRUT, each with unique income and tax advantages
- CRT strategies pair well with life insurance, retirement planning, and business exit strategies to maximize tax efficiency
- Before recommending a CRT, advisors must evaluate costs, irrevocability, and income timing to ensure proper fit for the client
- Financial advisors who understand CRTs gain a competitive advantage in addressing complex client goals and building long-term relationships
What Is a Charitable Remainder Trust (CRT) and Why Should Financial Advisors Care?
When a client walks into your office with highly appreciated assets, concerns about capital gains tax, and a need for steady income, how do you respond?
This is where understanding how a charitable remainder trust (CRT) works becomes your competitive advantage. It is how you differentiate yourself from other advisors in your community.
In our view, a charitable remainder trust is one of the most powerful planning tools in your arsenal.
A CRT could help your clients eliminate an immediate capital gains tax, provide an income stream, gain a tax deduction, remove the asset from their estate, and create a charitable legacy, all in one strategy.
Yet many advisors I meet hesitate to discuss CRTs, viewing them as too complex.
In this blog, I will break down the key elements so you can make this an option when speaking with clients, prospects, or centers of influence like CPAs.
I will use a bullet point format to make this blog an easy read. You can receive a complete CRT Financial Advisor guide by calling our Business Development Team at (858) 964 - 0500.
6 Key Benefits of a Charitable Remainder Trust (CRT) for Your Clients
There are six primary benefits to a Charitable Remainder trust:
- Eliminates capital gains tax at the point of sale
- Immediate tax deduction
- Portfolio diversification
- Flexible income options
- Provides a gift for a client’s donor-advised fund or charity
- Removes the asset from the estate
How Does a Charitable Remainder Trust Work?
The process follows five main steps:
- An attorney drafts the Charitable Remainder Trust document
- Your client transfers or donates the appreciated assets into the trust
- The trust sells the assets tax-free at the point of sale
- You then create a diversified portfolio on behalf of the CRT trust
- The trust provides income for your client, possibly for life or a set term
After your client passes away, the remaining assets go to their chosen charities or donor-advised fund.
Charitable Remainder Trust Example – Tax Savings in Action
Let us look at a real-world scenario:
Mary owns stock worth $1,000,000 with a $200,000 cost basis. Without a CRT, selling the stock creates an immediate $800,000 capital gain.
Instead, if we use a CRT:
- She avoids immediate capital gains tax
- Gets a charitable deduction
- Receives ongoing income
- Removes the asset from her estate
- Creates a charitable legacy
Types of CRTs
CRTs are flexible and can be customized based on a client’s needs.
The Charitable Remainder Unitrust (CRUT)
- A set percentage of the trust distribution is determined when the trust is formed
- Since we are keeping the distribution constant, payments change with trust value each year
- Minimum 5% payout
- Can add more assets later
Charitable Remainder Annuity Trust (CRAT)
- Fixed payments never change
- Fixed payment based on initial CRT Trust value
- No new contributions allowed
- Good for steady income needs
Net Income with Makeup Charitable Unitrust (NIMCRUT)
- Flexible income timing as your client can take the income in later years
- Payments not taken are “banked,” and your client can use them in later years
- Perfect for retirement planning
- Controls distribution timing
Flip Charitable Remainder Unitrust (Flip CRUT)
- Starts as NIMCRUT
- Changes to CRUT at a trigger point like retirement age
- Great for business sales
- Simpler administration
The Charitable Remainder Trust Deduction
Your clients enjoy two major tax advantages when using a CRT:
1. Immediate charitable deduction
- Based on the expected remainder value
- Reduces current tax bill
- Amount varies with age and payout rate
2. Capital gains tax savings
- No tax when the trust sells assets
- More money stays invested
- Better long-term growth potential
Life Insurance and Key Planning Strategies
Consider these opportunities:
- Pair with life insurance for wealth replacement
- Use for retirement income planning
- Convert concentrated positions
- Reduce estate tax exposure
- Create lasting charitable impact
CRT Risks & Considerations: What Every Financial Advisor Should Know
Before implementing, evaluate:
Risks
- Irrevocable decision
- Cannot recover assets
- Market impact on payments
- Ongoing fees
Costs
- Setup fee for an attorney to draft the trust
- Annual trust administration fee
- Investment management
- Tax Preparation
How to Get Started with CRTs
Success with CRTs requires:
- Clear client communication
- Proper structure selection
- Coordination with other advisors
- Understanding of client goals
- Regular monitoring and updates
Next Steps for Advisors: How Financial Advisors Can Use CRTs
Ready to implement CRT strategies for your clients? Contact Dunham’s Business Development Team at (858) 964-0500 for a personalized consultation and exclusive resources
- Identify suitable clients with appreciated assets
- Review their charitable goals
- Analyze their tax situation
- Consider timing if their income and asset sale needs
- Select the appropriate structure
- Run illustrates the benefits of this program
Closing Thoughts
Remember, charitable remainder trusts offer powerful benefits when matched with the right client situation. Understanding how they work helps you deliver better solutions and grow your practice.
Sources:
- Charitable remainder trusts, The IRS, updated August 26, 2024, https://www.irs.gov/charities-non-profits/charitable-remainder-trusts
- Charitable remainder unitrust, Wikipedia, N/D, https://en.wikipedia.org/wiki/Charitable_remainder_unitrust
- NIMCRUT Basics, Shenkman Law, Ted R. Batson, JR., n/d, https://shenkmanlaw.com › uploads › 2024/03
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
All examples are hypothetical and are for illustrative purposes only.
Federal and state laws and regulations are complex and subject to change, which can materially impact your results.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Charitable Remainder Trust:
Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Dunham Trust Company cannot guarantee that such information is accurate, complete, or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
The trust is subject to the published fee schedule at the time the trust is established.
Although the trust itself is a tax-exempt entity, the trust income distributed to beneficiaries is taxable, according to terms dictated by the U.S. Internal Revenue Code and accompanying U.S. Treasury regulations.
There are two types of CRTs, Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Both CRATs and CRUTs require that payments be made to designated individuals for their lifetimes or a fixed term not exceeding 20 years.
Because the annuity payments from CRATS are fixed and must immediately begin after the creation of the trust, the underlying assets within the structure must be kept highly liquid.
Income tax consequences for the donor can be complex, depending on the individual situation. All or some of the income from the trust may be taxed at ordinary income rates, but part may be taxed at lower capital gains tax rates, or may even be tax-free, for some years.
Dunham Trust Company does not guarantee the completion of the installment note as investments will be subject to market conditions.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
Trust services offered through Dunham Trust Company (“DTC”), a Nevada Trust Company. Dunham Private Trust is the Wyoming division of Dunham Trust Company. Dunham and DTC are affiliated entities.