Charitable Remainder Trusts
Charitable remainder trusts provide income payments before passing remaining assets to charity.
A donor may find that while there is slightly more effort and expense involved in setting up a trust, it can be an extremely useful and flexible way to:
- Reduce income taxes
- Convert appreciated assets into a lifetime income stream
- Bypass the capital gains tax
- Benefit the UMass Foundation and other personally meaningful charities
- Make a gift now or in a will
It works like this:
- The donor transfers money or property to the irrevocable trust (often non-producing appreciated property held for over one year), removing the property from their estate.
- The donor pays no capital gains tax on the transfer.
- The donor qualifies for an immediate income tax deduction (if they itemize) for our estimated remainder interest.
- The donor names the income beneficiaries—they can direct income to themselves, a spouse, or anyone else they choose.
- The trustee manages the assets and pays out an income for life or for a set number of years (up to 20) to the named beneficiaries. Income payments typically equal 5% of the trust value, but the donor can set the amount within legal limits.
- At the end of the trust term, the trust pays out the remaining assets to the UMass Foundation (or other named charitable beneficiaries).
Comparing a CRAT and a CRUT
There are two main types of charitable remainder trusts—a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). There are two main differences:
- Income payments. A CRAT offers a fixed payment that is a percentage of the initial assets in the trust. This provides a steady, reliable income stream and can be a good way to lock in a high interest rate. A CRUT offers a variable payment amount that is a percentage of the trust assets as revalued annually. This serves as a hedge against inflation.
- Flexibility. A CRAT comes in just one form and cannot accept additional contributions. A CRUT is more flexible—it comes in four different types and can accept additional contributions.
A new funding option
Note that an IRA owner age 70½ or older can choose to fund a new CRT by making a one-time, tax-free distribution from the IRA of up to $53,000 (in 2024). (Spouses may combine their distributions from their own IRAs into a single CRT, which is useful as $100,000 is often the minimum funding level.) This distribution does not create a charitable income tax deduction, but it does count toward the donor's required minimum distribution if one is due. A CRT created this way has slightly different rules than regular CRTs.
Evaluate the fit.
A CRT may be a particularly good option for those who want to:
- Make a major gift and gain immediate income tax benefits, all without a loss of spendable income
- Make a significant property gift but don’t want to lose the income produced by the asset
- Convert an appreciated asset into an income stream
Older donors interested in the steady income of a charitable remainder annuity trust should compare the trust with a charitable gift annuity, which may be able to provide higher income payments.
A Give-it-Twice Trust
Donors who want to provide for their family and UMass Law after death might consider a CRUT created in a will—technically a testamentary CRUT, but often called a “give it twice” trust. It works like this:
- The donor includes provisions in their will to create and fund the CRUT (many people fund the trust by simply naming the trust as the beneficiary of their retirement accounts).
- When the donor dies, the selected assets will go into the trust and the donor’s spouse, children, or other named beneficiaries will receive income payments for life (or a period up to 20 years).
- At the end of the trust term, the remaining trust assets will be distributed to the UMass Foundation.
Consider the timing.
If your client wants to qualify for a charitable deduction this year, they should initiate the transfer of the assets to the trust as early as November to ensure everything is properly established by the end of the year.
The UMass Dartmouth Advancement Team can help.
Talk to us about how your clients can tailor a charitable remainder trust to meet their personal or family needs. We can also provide you with the estimated deduction amount that would be available for a particular gift (the amount depends partly on the applicable federal rate, which changes every month), as well as the estimated income payment amount.