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The Charitable Remainder Trust (CRT)

Nov. 8, 2022

The tax Code provides a very strong incentive for making gifts of appreciated property to charity. Not only is there an income tax deduction for the fair market value of the contributed property, which offsets ordinary income, but at the same time you do not recognize the gain on which you would have been taxed had you sold the property and contributed the proceeds.

But what if you could claim a deduction for at least a portion of the value of the property, while also receiving an income stream from the proceeds of sale, somewhat in the manner of an installment sale?

This is the basic premise of the charitable remainder trust, or CRT. You contribute appreciated property to an irrevocable trust, which pays income back to you over your lifetime or for a term of years, with the remainder at your death or at the end of the term to one or more charities of your choice.

The trust itself is exempt from income tax, which means that when the property is sold by the trustee, there is no immediate tax on the gain. Instead, the gain is included in the amounts that are distributed to you as income over some number of years, somewhat in the manner of an installment sale.

Of course, there are a few requirements in the tax Code that must be met to achieve this result.

One, the present value of the remainder to charity must be at least ten percent. That calculation is made with reference to actuarial tables the IRS revises every ten years, which provide remainder factors based on current yields on Treasury notes on the date the trust is set up.

And two, your retained "income" interest must be in the form of either a fixed annuity, at least five percent of the fair market value of the property contributed to the trust, or a "unitrust" amount, also at least five percent. A unitrust is a fixed percentage of the value of the trust assets, updated every year.

It is also possible to set up a charitable remainder trust for the benefit of someone other than yourself, for example a spouse or child, and/or for more than one life, provided the ten percent remainder requirement is met. There may be gift tax implications to these arrangements, but these can be addressed by reserving a power to revoke the "income" gift, so that the gift is incomplete until distributions are actually made.

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