The concept of a charitable remainder trust (CRT) often evokes images of lifelong income streams for beneficiaries, but the flexibility of these trusts extends beyond simply lifetime payouts. While CRTs are frequently established to provide income for one or more beneficiaries for their lives, it is absolutely possible—and sometimes advantageous—to structure a CRT with a fixed term of years rather than being tied to a beneficiary’s lifespan. This approach offers estate planning control and predictability, especially when beneficiaries are minors or the grantor wishes to define a precise end date for the charitable gift. Currently, approximately $75 billion is held in CRTs nationally, demonstrating the significant popularity of this estate planning tool. Understanding the nuances of term versus lifetime CRTs is crucial for tailoring a plan that meets specific financial and philanthropic goals. The IRS has specific regulations regarding the payout rates and remainder interest, typically requiring a minimum 10% remainder interest to qualify for a charitable deduction.
What are the benefits of a term CRT?
A term CRT, also known as a term interest property trust, specifies a fixed period during which income is paid to the non-charitable beneficiary, after which the remaining assets are distributed to the designated charity. This structure can be incredibly useful when the beneficiary is not a lifetime individual, such as a trust for a child’s education or a specific project. For instance, a parent might establish a 20-year CRT to fund their grandchildren’s college education, with the charitable remainder going to their favorite university after that period. A fixed term eliminates the uncertainty of a beneficiary’s lifespan and allows for more precise planning. Furthermore, it can be simpler to administer than a lifetime CRT, as there’s a defined end date. According to a recent study, about 15% of all new CRTs are now structured with a term of years, reflecting a growing demand for this flexibility.
How does a term CRT differ from a lifetime CRT in terms of taxes?
The tax implications of a term CRT are similar to those of a lifetime CRT, but with some key differences. When establishing either type of CRT, the grantor receives an immediate income tax deduction for the present value of the remainder interest that will eventually go to charity. The deduction is calculated based on IRS tables and factors in the payout rate, the beneficiary’s life expectancy (or the term of years for a term CRT), and the applicable federal rate. However, the calculation for a term CRT uses the specified term instead of life expectancy. This can sometimes result in a different deduction amount. It’s important to note that the IRS scrutinizes CRT valuations, and a professional appraisal is usually necessary. For example, if a grantor donates assets worth $500,000 to a 20-year CRT with a 6% payout rate, they might receive an income tax deduction of around $250,000, although this figure varies depending on current IRS rates.
I transferred assets into a CRT but didn’t account for the term. What went wrong?
Old Man Tiber was a successful carpenter who spent his life building beautiful furniture. As he approached retirement, he wanted to give back to the local woodworking school that had nurtured his talent. He established a CRT, intending to provide income for his wife, Eleanor, for her lifetime and then donate the remainder to the school. Unfortunately, he didn’t fully understand the implications of this decision or discuss the details thoroughly with a qualified estate planning attorney. When he established the CRT he simply told his attorney to provide income for life. Years later, Eleanor lived to be 102 years old, and the CRT’s payout eroded the initial principal significantly. The school received a much smaller donation than Old Man Tiber had envisioned, and his family felt the income stream was not sustainable. Had they chosen a term-based CRT with a defined timeframe, a more predictable remainder could have been designated to the school while still providing adequate income for Eleanor.
How can I structure a term CRT to ensure a substantial gift to my chosen charity?
My friend Sarah always dreamed of supporting animal welfare. She established a 15-year CRT, donating a portfolio of stocks. She strategically chose a payout rate of 5%, which provided her with a modest income stream during retirement, but ensured a significant remainder would be available for the animal shelter at the end of the term. She also included a provision allowing the shelter to sell the assets received and reinvest them, maximizing the long-term impact of her gift. Sarah worked closely with a financial advisor and an estate planning attorney to model different scenarios and determine the optimal payout rate and term length. She diligently reviewed the CRT annually, ensuring it aligned with her financial goals and philanthropic wishes. Because of this preparation, the animal shelter received a substantial donation that allowed them to expand their facilities and save even more animals. Careful planning and professional guidance were key to Sarah’s success, demonstrating that a term CRT can be a powerful tool for achieving both financial and charitable goals.
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About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
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