Many of my South Florida clients ask me if they should consider adding a residual charitable trust (CRT) to their real estate plan without really understanding what it is and what it actually accomplishes. There are two types of charitable residual trusts: charitable residual annuity trusts (CRAT) and charitable residual trusts (CRUT).
A CRAT is a trust in which a fixed percentage or dollar payment is paid to the grantor at least once a year. Annual payments must be not less than 5 percent and not more than 50 percent of the initial fair market value of the trust property. Payments can be made for the lifetime of the beneficiary or for a term of 20 years or less. Payments may not increase or decrease during the term of the trust, and additional gifts may not be awarded to the trust. Upon the death of the annuitant beneficiary, the remainder is transferred to a charity or kept in a trust and distributed to charity. A typical CRAT would, for example, pay an annual payment of $5,000 to the Grantor from an initial one-time gift to a CRAT of $100,000.
A CRUT has the same requirements as a CRAT, except that the annual payment is a fixed percentage that must be reset annually after the revaluation of the trust property. Annual payments will increase or decrease depending on the value of the trust assets. The limited exception to this rule is that the Grantor may take the lesser trust income or 5 percent of the trust assets. CRUT also allows the granting of additional gifts to trusts. A typical CRUT will pay 5 percent of the fair market value of the trust as determined on December 31 of the previous year, payable in 12 monthly installments. While the percentage will remain the same, the dollar amount received from CRUT by the Grantor will change annually based on an increase or decrease in the value of the trust asset.
Generally, for both types of trusts, the balance must be at least 10 percent of the fair market value of the assets transferred to the trust. Both types of trust provide income and property tax benefits to the Grantor. The charitable residual interest value is the charitable contribution that is deductible from the individual Grantor’s income tax return for the year in which the assets were transferred to the trust. Any unused pieces can be carried for 5 years. If the CRT is established after the death of the Grantor, it will result in a real tax deduction for the remaining interest. Pairing a CRT with a large life insurance policy can result in a greater inheritance to the Beneficiary of the Grantor than can be done without a CRT.
CRTs can be a very valuable estate planning and tax deduction tool, if implemented properly. To determine if a CRT is right for your situation, you should arrange a meeting with your South Florida estate planning attorney, your CPA, and your life insurance agent. These professionals, together with your financial advisor, will be able to assess your financial situation and come up with a plan that is right for you. Plantation plans are not cookie cutter molds and should not be designed in a one-size-fits-all manner.