Many of the great families I work with as a Grand Rapids, Michigan estate planning lawyer, desire to give some or all of their “stuff” (e.g. assets) to charity when they pass away. In some cases, their children support this goal and in some cases they do not. Well, it turns out that you can benefit your family AND a charity by using a charitable trust. Charitable trusts generally come in two flavors: (1) a Charitable Remainder Trust (CRT), or (2) a Charitable Lead Trust (CLT). In this post, we’ll get a high-level view of a CRT.
Benefits of a CRT can include any or all of the following:
- Defer capital gains taxes on the sale of appreciated assets;
- Provide you with a new source of income;
- Provide you a substantial current income tax charitable deduction; and
- Provide you future estate tax deductions.
What is a CRT? Well, much like a CLT, a CRT is what’s called a “split interest trust.” That is, there are two main interests, many times referred to as a “lead interest” and a “remainder interest. The difference in these interests is what enables you to benefit you (and your family) AND the charities you support. In a CRT, the “lead interest” typically benefits you and/or your family. A CRT generally delivers the best results when you have a highly appreciated asset (e.g., real estate or stocks) that provide little or no income.
The first step is design and drafting the CRT. General terms involve direction on the “lead interest” and the “remainder interest.” Generally, during the lead time, the CRT pays you (and whoever else you may designate in the trust) an income stream based on either a term of years or a percentage of the value of the assets in the trust over one or more lifetimes. When the lead interest has run it’s course, the remaining trust assets (the “remainder interest”), if any, will go to a charity or charities of your choosing.
The second step is transferring the highly appreciated asset to the CRT in return for the trust’s obligation to provide you with an income stream over the term or lifetimes you choose. The annual income stream cannot be less than 5% of the asset’s value and may range up to as much as 50% depending on the term over which you have chosen to be paid and the interest rate involved.
The third step is for the CRT to sell the appreciated asset (paying no tax because of its favorable tax status).
Step four involves the CRT paying you an income steam for the term or lifetimes you designated, from the liquid resources provided by the sale.
Finally, after the CRT’s lead term has run (in years or lifetimes), it distributes any remaining assets to the charities you have designated and the CRT terminates.
This explanation is a big simplification of the process involved, but it should give you a great example of how a CRT may play an important role in your family’s estate plan. Call me at 616-827-7596 if you have questions about how a CRT can benefit your family or how to administer a CRT you’ve already put in place.
Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™. This goes beyond merely planning for finances – it’s about who your are and what’s important to you. He focuses on estate and asset protection planning for the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.