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Domestic Non Grantor Trust | Ultra Trust | Sale Agreement | Engineered Capital Gains Transactions | SAM/SAL | Charitable Remainder Trust | Charitable Lead Trust

CHARITABLE REMAINDER TRUST

With a CRT transaction a person(s) gifts an asset, normally an appreciated asset to a charity through a trust. The trust in time sells the appreciated asset or the charity funds the trust. Because the asset is owned by a qualified charity the charity has zero capital gains tax. Next the charity may purchase life insurance usually insuring the lives of the person(s) making the gift. The amount of the life insurance is normally equal to the market value of the donated appreciated asset. In addition, the charity through the trust makes annual payments to the donor(s). These payments must comply with certain very specific IRS regulations. A CRT must have an independent trustee.

Payments - Optional

  1. May be annuitized as a fixed sum over the distribution time. That distribution time can be either the life of the donor(s) or a fixed period not to exceed 20 years, or
  2. Can be a UniTrust - In a UniTrust the payments are stated as a percentage of the assets held by the trust on a valuation day each year, normally the first day of the year.

In addition, the following terms and conditions must be met:

  1. The payments must be calculated so that at the end of the payment term at least 10% of the original market value of the contributed asset goes to the charity.
  2. At least one beneficiary of the trust must be a non charity.
  3. There may be a class of non charity beneficiaries (grandchildren/children).
  4. The yearly payment to the donor must be no less than five (5) percent and no more than eight (8) percent of the fair market value of the assets placed in the trust at the initial contribution.
  5. Payments may never be greater than fifty (50) percent of the fair market value of the trust as valuated on the first of each year.
  6. Flip UniTrusts are allowed. In a flip UniTrust the trust flips from a percentage of the assets to a fixed yearly amount. However, the triggering must be spelled out in the trust language and must be on a specific date or a single occurrence and is not discretionary or within the control of the trustee.

Taxes

A CRT can be established intervivos or testamentary. The grantor (donor) of an intervivos CRT is entitled to an immediate income and gift tax charitable deduction equal to the current fair market value of the remainder interest that will ultimately pass to the charity. The grantor (donor) of a testamentary CRT estate is entitled to a charitable tax deduction for the fair market value of the remainder interest. A CRT is exempt from income tax so long as the CRT has no unrelated business income. A CRT is not taxed on any gain realized in selling appreciated assets contributed by the grantor. In any year in which a trust realizes unrelated business taxable income the trust is subject to taxes as a complex trust. (The trust pays its own tax at a very high rate.) The income to a grantor (donor) from the trust is taxable as ordinary income to the grantor.

General Terms and Conditions

  1. A CRT must be an irrevocable trust with an independent trustee.
  2. A CRT may not be created by an "S" Corporation and a CRT may not hold "S" Corporation stock.
  3. Yearly payments from a CRT may be made to both a charitable beneficiary and a non charitable "person". The IRS Code generally defines a "person" as an individual, named member of a class, another trust, an estate, a partnership, association, company or a corporation.
  4. Encumbered or mortgaged assets may not be contributed to a CRT unless the grantor is released from any personal liability for the payment of the debt and the encumbrance is removed from the asset prior to the asset being contributed to the CRT.
  5. All CRTs must use a calendar year for all calculations.
  6. Once funded CRTs may not return the original assets to the grantor without very unfavorable tax results.
  7. At no time during the life of the non charity beneficiary may the value of the assets held by the trust fall below 10% of the original asset value.
  8. Additional contributions can be made to a UniTrust but not to an annuity trust.
  9. Care must be used in the governing instrument in terms of restricting the investments available to a trustee.
  10. A grantor may serve as the trustee only under some very stringent rules.
  11. Distributions (payments) from a CRT may be made in cash or property.
  12. Income attributable to payments of the annuity or UniTrust amount is deemed distributed on the last day of the trust taxable year (calendar year) even if the amount is not actually distributed until a later date.

A CRT offers a client with an appreciated asset and an inclination toward charitable giving an opportunity to:

  1. Sell the appreciated asset with no capital gains tax.
  2. Guarantee an income flow for a period of years.
  3. Gain a charitable tax deduction.
  4. Keep their estate at its current value by having the charity replace the value of the appreciated asset with life insurance and in so doing eliminate estate tax considerations.

Charitable Remainder Trusts are defined under Section 664 of the IRS Code.

Click here to view chart of Charitable Remainder Trust.
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