Philanthropic Planning: The Tax Advantages of Charitable Remainder Trusts (CRTs)

If you’ve been following the Illumination Wealth Blog this month, you will have discovered our article series on philanthropic planning. We are covering different charitable giving strategies. You can share your wealth to support the charities you care about most, while also enjoying the excellent tax benefits that come along with charitable gifting. Here are the first three articles in case you missed them:

• A Comprehensive Guide to Charitable Giving Strategies
• Maximize Capital Gains by Gifting Appreciated Stock
• The Benefits of Donor-Advised Funds (DAFs)

What is a Charitable Remainder Trust (CRT)?

In this final article, we will be focusing on using a charitable remainder trust (CRT) as another option you can consider for charitable giving and tax-deferred savings. A CRT is similar to a DAF in that it is an investment fund that enables you to donate cash, appreciated securities or other qualified financial assets. However, the key difference is that you can withdraw income from the trust as it earns and grows. You must still donate some of the trust’s financial assets to your specified charity at the end of the trust’s term in order to qualify for the tax benefits.

A charitable remainder trust will distribute income to you annually for a specified period (as defined by the trust). Once the trust’s term is over, the remainder is donated to a charity you have selected. Capital gains taxes can be deferred. At the same time, both you and the charity can potentially earn more as the trust grows.

Benefits of a Charitable Remainder Trust

Here are some of the key benefits of a charitable remainder trust:

1. Tax-Free Compounding & Tax Deferral—A CRT effectively protects your capital gains from taxes when you sell. The tax money saved is reinvested and continues to grow in the trust.
2. Upfront Tax Deduction—In exchange for the charitable gift you will be giving at the end of the trust, you will be eligible for an immediate tax deduction. You can claim it the year you first fund your trust, and the deduction is approximately 10% of the total asset value.
3. Support Your Charity—When you establish the charitable remainder trust, you can select a qualified charity of your choice. They will receive the remainder of the trust once the term is complete.
4. Tax Smoothing—A CRT allows you to spread out your proceeds across the term of the trust as you take annual distributions. This can help lower your effective tax rate and smooth out your taxable income.
5. Earning Potential—A well-planned CRT can provide as much as 50% or 100% in returns when used with appreciated assets, even once the charitable remainder donation has been given.

A charitable remainder trust is not the right charitable giving strategy for everyone, but it may be the best solution for you. Talk with your financial advisor and tax planner to learn more about CRTs and other options before making any big moves. For all your wealth management needs, you can count on the team at Illumination Wealth. Contact us today to get started.