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LIFESTYLE

ne of the most popular vehicles for giving to charities, as well as an

efficient estate planning tool, is the Charitable Remainder Trust,

better known as a CRT. There are four main advantages to creating

a CRT. One is the ability to put highly appreciated assets or property

into the trust and subsequently sell all or part of the assets while avoiding a

capital gains tax. The second is the donor (grantor) can receive income from

the trust while still living. In many cases, the beneficiaries of the grantor can

also receive income for a specified period of time, at which point the

remaining value of the trust, the principal, is given to the charity that was

previously chosen. The third advantage is the grantor is entitled to a current

income tax deduction for the fair market value of the donated assets. Fourth,

the donated assets are no longer included in the estate for estate tax purposes

at the death of the donor.

Assets that are commonly transferred to a CRT are cash, securities (stocks,

bonds, mutual funds, etc.), real estate, a business or a combination of them.

The maximum amount of income that the donor and/or beneficiaries can

receive is based on the value of the gift and the ages of those who will receive

the income. The amount that you would be able to use as a charitable

deduction is based on the amount of the gift, the cost basis and your income

tax bracket. The donor may have control over how the assets are invested

within the trust, may choose more than one charity, and may switch from one

charity to another.

The CRT is a great estate planning tool because it reduces the value of the

estate for estate tax purposes to your children and/or grandchildren. The CRT

can be paired with an Irrevocable Life Insurance Trust (ILIT) funded with a life

insurance policy for the same value as the asset that was donated to the

charities in the CRT. This plan, if done properly, makes the proceeds from the

life insurance income tax-free and estate tax-free to the beneficiaries. This is

a strategy known as wealth replacement, meaning replacing a taxable asset

with a tax-free asset to your children at your death.

The downsides to this type of estate planning are that the donation of an asset

to the trust is an irrevocable decision; the donor or beneficiaries receive an

annuity payment from the trust leaving very little flexibility to the income

stream; and spendthrift provisions in the CRT may prevent the sale of the

income interest (if the donor wishes to get his or her hands on a lump sum of

money from the CRT by selling the remaining value of the income stream to

a company that buys them).

There are no gift tax concerns with this type of hybrid plan. However, as you

may have already guessed, this type of philanthropic giving with the

associated tax benefits can be powerful but complex. Charitable remainder

trusts are a specialty and you should only consider working with estate

planning attorneys, tax advisors and financial advisors who are very

experienced at putting together the type of plan that would be best for you.

Your family situation, current income needs, income tax bracket, estimated

estate tax liability and financial consequences are just a few of the important

factors in determining whether this irrevocable estate planning strategy is

beneficial in meeting the current and future needs of your family. Experts who

have mastered this complicated area are the best people to advise you on how

to design your personalized charitable giving plan.

Watch for Part II of this article where I discuss the difference between a

Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder

Unitrust (CRUT).

Robin S. Davis is a Certified Financial Planner™, a member of the Financial

Planning Association and the owner of Davis Wealth Management Group,

Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held

over 500 public seminars on financial issues. She is the author of the book

Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten

Easy Tests for Finding the Best One. Davis expresses the importance of

utilizing a competent financial advisor. For more information, please call

(800) 896-5422 or (772) 463-4441, visit www.daviswealth.com or email

rdavis@daviswealth.com.

“Davis Wealth Management Group, an independent firm with securities

offered through Summit Brokerage Services, Inc.  Member FINRA & SIPC, and

advisory services offered through Summit Financial Group, Inc., a registered

investment advisor.”

PHILANTHROPY REVISITED — PART IGiving through Charitable Remainder Trusts

By Robin S. Davis, CFP

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