CHARITABLE REMAINDER TRUSTS
A Charitable Remainder Trust is designed to reduce taxes while producing an income stream for the donor or designated beneficiary over a stated period. Once this timeframe expires, the remaining value of the trust is transferred to designated charities. Charitable remainder trusts are irrevocable, which means that by creating such a trust, you remove your rights of ownership to the assets.
The two main types of charitable trusts have funny sounding acronyms:
1. Charitable Remainder Annuity Trusts (CRATs) distribute a fixed payment each year.
2. Charitable Remainder Unit Trusts or (CRUTs) distribute a fixed percentage based on the annual balance of the trust assets.
REAL LIFE EXAMPLE
George (not his real name) was a real estate developer in Pennsylvania who did very well financially. As part of his estate planning process he created a CRUT and he gifted to it a townhouse. George had purchased this townhouse while it was still under construction, 17 years earlier. The property value had increased significantly and George’s cost basis in the home was minimal. Placing this home into the trust allowed for the sale of the property without incurring capital gains tax, removal of the asset from the personal estate, continue to generate a flow of income AND ultimately leave a gift to one of his favorite charities.